Wrongful trading can lead to directors being disqualified from
taking on any directorships for a period of 15 years, being forced
to pay heavy fines and, in some cases, being made to repay losses
incurred during the period of wrongful trading.
These measures are intended to ensure that directors act to
protect investor and creditor interests. The problem for directors
of dot.com companies is that it is extremely difficult to ascertain
at what point they should cease trading.
Many dot.com companies, that rely mainly on outside investors,
have very few assets and so directors cannot easily predict when
they will run out of funding.
The issue has become very relevant given the downward turn in
dot.com investment in recent months. This has been illustrated by
recent high profile collapses, including those of Toysmart.com and
Boo.com.
These events have made investors wary of over-funding internet
start-up companies that may produce only minimal returns for
shareholders.
These factors combine to highlight the dilemmas that dot.com
directors face when their companies lack consistent financial
backing.
In commenting on its role in bringing prosecutions for wrongful
trading, the Department of Trade and Industry made clear that it
would “take action whenever appropriate when a director has not
acted in the best interests of the shareholders”.
