Trading whilst insolvent can lead to a breach of the Insolvency Act 1986, under the stipulation of wrongful trading. It is therefore important to take care and know the risks if your business is struggling financially. 

Directors are protected from the consequences of a failed company, so long as they have acted reasonably, responsibly, and lawfully. If you do not do this, directors may be held personally liable for the debt of the company. 

There were some changes during the coronavirus period, with the emergence of new legislation being one noteworthy thing. This meant that some rules surrounding wrongful trading were relaxed. 

At some moments, directors could not be made personally liable if they continued to trade because the situation of the world was crippling businesses across the board.

How do I determine whether my business is insolvent?

An easy way to check is to see whether your company can meet all of its liability payments when they are due to be paid. Your company is insolvent if you cannot meet those payments. At this point, a company director’s legal duty is to put the interests of the company’s creditors above all else. A limited company status protects its directors from personal liability, however, this protection is compromised when the company becomes insolvent if it continues to trade. That will worsen 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 into contact with a licensed insolvency practitioner. They will analyse your situation and give you a way of moving forwards.

What happens if I trade while I am insolvent?

Directors who have knowingly traded while insolvent will risk their disqualification under the Company Directors Disqualification Act of 1986, if the company goes into liquidation. 

The liquidator must make a report of the disqualification.

If the liquidator has stumbled across wrongful trading which puts the director(s) in a bad light, they might make the court apply for an order that will disqualify the director for a certain time period. This is known as a “D report” and it is usually quite negative or positive. 

It’s worth nothing that director disqualifications are still really rare. There are only 1000 to 1500 per year. However, there are many more examples in the public domain. 

Directors who know that they have acted wrongfully can admit that fact in return for lower penalties. It speeds up the process and lessens the consequences. 

For example, a director might receive a 2-3 year ban as opposed to an 8 year ban, simply by speeding up the process and admitting the error of their ways. 

How can I avoid trading whilst insolvent?

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. 

How do I avoid personal liability?

You need to ensure that you have up-to-date cashflow 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.

What are antecedent transactions?

These 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 

Preferential payments could be:

  • Transferring of property to the relative of a director 
  • Repaying of a particular loan as the director has provided a personal guarantee 

What is a transaction at undervalue?

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. 

What is misfeasance? 

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

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Could you be trading whilst insolvent? 633f49054966c

Could you be trading whilst insolvent? 633f4905496ab