If you’re a company director, it’s essential to understand what trading while insolvent means. Put simply, it’s when you continue to trade your business despite knowing that it’s insolvent. In other words, your company is unable to pay its debts as they become due.

The consequences of trading while insolvent can be severe for both you and your company. If you’re found to have traded while insolvent, you could be held personally liable for your company’s debts.

This means that you could be forced to pay back the money owed from your own personal funds, and you could even face disqualification as a director.

It’s crucial to know how to determine whether your business is insolvent. One simple way to check is to see whether your company can meet all of its liability payments when they are due to be paid. If you can’t meet those payments, your company is insolvent.

When your company becomes insolvent, a director’s legal duty is to put the interests of the company’s creditors above all else.

While a limited company status protects its directors from personal liability, this protection is compromised when the company continues to trade despite being insolvent. This worsens the position of the company’s creditors.

Key directors should work out if there is a viable strategy for turning the ship around.

If there isn’t, the company may have to be formally liquidated. If you wish to go down this path, then you have to get in contact with a licensed insolvency practitioner. They will analyse your situation and give you a way of moving forward.

As a director, you need to act sensibly and responsibly at all times. If your business is in a financial struggle, make sure your finances are all laid out and understood. You need to make sure that you know how to deal with creditors.

If the business starts to spiral downhill financially, directors need to act as soon as possible. Our compassionate financial experts can help you if you are in a situation like this and you don’t know where to turn.

One way to avoid trading while insolvent is to ensure that you have up-to-date cash flow models, as well as budgets illustrating profit and loss. In addition, you should make sure that you are fully aware of the situation. A sales director, for example, has to know the financial position of the business. All directors need to have a clear understanding.

You could have regular board meetings, ensuring that you can discuss the position of your business, the money coming in and out, as well as the decisions that you need to take.

If the company continues to struggle and the board cannot meet its payments, you will have to look at another solution. This could be administration, a Company Voluntary Arrangement (CVA), or a time for liquidation.

Antecedent transactions are transactions that took place before a company’s insolvency that may have had a negative effect on creditor returns or disadvantaged a particular creditor. These include:

• A creditor(s) is/are paid as a priority before others, or others are put at a disadvantage

• Transferring of property to the relative of a director

• Repaying of a particular loan as the director has provided a personal guarantee

When a company enters insolvency, these transactions can be investigated. If they are found to be in breach of the law, they can be reversed, and the assets recovered for the benefit of all creditors.

This is when you sell a company asset for less than its actual valuation.

This could include selling an asset for less than it’s worth or giving that asset to a family member. These examples are often designed to protect business assets when directors know that their company is insolvent.

However, such action will be of detriment to creditors. The office holder will analyse the transactions that occurred two to three years before the date of insolvency. They are meticulous. 

This is when a director(s) breaches their duties, purposely taking illegal actions. It isn’t an illegal act but it is deemed to be inappropriate and unjust. Some examples of this would be the misappropriation of company property, or taking out a salary when you know that the company cannot support it. Wrongful trading Directors should always be aware of the company’s financial situation.

Continuing in business when you know that your company is insolvent could see you accused of wrongfully trading. The interest of creditors must always be the priority. Examples of wrongful trading could involve: 

• Extending a line of credit with suppliers 

• Taking on board a large salary when the business will not be able to support it 

• Taking on another debt with the company 

• Not keeping track of annual returns of company accounts

Trading while insolvent can lead to serious consequences for directors, including personal liability for the company’s debt.

However It is important to seek professional advice if you suspect that your company is insolvent. A licensed insolvency practitioner can help you understand your options and provide guidance on the best course of action for your specific situation.

In conclusion, trading while insolvent can have serious consequences for both the company and its directors. It is important for directors to act responsibly and take appropriate action when a company is in financial difficulty.

Seeking professional advice early on can help prevent the situation from escalating and minimize the impact on creditors and stakeholders.

If you are in a situation where you are unsure whether your business is insolvent or need help with the insolvency process, contact a licensed insolvency practitioner or the Business Helpline for confidential advice and support.

Remember, by taking swift action, you can protect your business, your creditors, and yourself from unnecessary financial harm.