Under which circumstance would a person be liable for wrongful trading?

A person would be liable for wrongful trading primarily when they continue to carry on business knowing that the company is insolvent. This scenario applies particularly to directors involved in the management of a company. If a director allows the company to incur additional debt when they are aware, or ought to have been aware, that the company is unable to pay its debts as they fall due, they can be held responsible for wrongful trading.

The rationale behind this liability is to protect creditors and ensure that individuals in management positions take responsible and ethical actions regarding the financial health of the company. This provision is intended to deter irresponsible behaviors among directors that could exacerbate the financial problems of the company, potentially leading to greater losses for creditors.

Negligent actions do not inherently meet the threshold for wrongful trading unless they contribute to a situation where the director should have recognized the insolvency. A sleeping partner typically does not engage in management decisions and is not accountable for wrongful trading. Furthermore, failing to disclose information may involve different legal implications though it does not directly constitute wrongful trading unless it relates to the knowledge of insolvency.