Trading whilst insolvent refers to when directors continue to trade their company despite the fact it has become insolvent; insolvent usually being defined as when a company can no longer make day to day payments for the continuation of trade, or if assets are outweighed by liabilities on the balance sheet. Trading whilst insolvent is significant because it can be considered a failure on the directors’ behalf to keep losses to creditors at a minimum if the company ends up having to enter an insolvency procedure such as compulsory liquidation or administration. This could result in directors being made personally responsible for the amount owed to creditors and being obliged to repay the creditors out of their own pockets.
Trading whilst insolvent and acting irresponsibly, what are the consequences?
When a company enters a liquidation proceeding such as compulsory liquidation or a creditors voluntary liquidation, there is always an investigation into the conduct of all directors who held office in the 3 years prior to the appointment of the liquidator. The purpose of this investigation is to ensure that directors have acted responsibly and whether they took appropriate action to mitigate creditor loses. The information gathered during this investigation will be collated into a ‘D report’ and will be presented to the insolvency service, who will be responsible for deciding whether any further action is to be taken. If sufficient evidence is found that directors could have exercised a reasonable degree of foresight, or have acted downright irresponsibly, directors may find themselves becoming personally liable for the company’s debt to creditors. It may even lead to the insolvency service issuing a disqualification, as they have the power to ban an individual from acting as a company director for a maximum of 15 years.
How to protect yourself if trading whilst insolvent
In order to try and avoid personal liability when trading whilst insolvent, it is vital that directors seek professional advice as soon as possible and initiate preventative measures in order to protect themselves. Trading whilst insolvent is not strictly speaking illegal, however, once directors become aware of it they have a duty of care to minimise creditor loses. Often the best way to minimise creditor loses is to place the company into company administration or a creditors voluntary liquidation. In order to protect themselves, directors should ensure take reasonable care and exercise common sense in order to avoid doing anything to the detriment of company creditors. This includes, but is not limited to, the following:
- Taking money out of the company in order to fund personal luxuries such as cars or holidays.
- Collecting an unreasonably high salary when the company cannot afford it.
- Transferring assets from the insolvent company for free or for significantly less than valued in an attempt to exclude it from any future insolvency proceedings.
- Paying creditors in preference to others.
What to do if trading whilst insolvent
If you think your company is trading whilst insolvent, the need for immediate action cannot be overstated. It is of paramount importance to seek professional guidance in order to evaluate the situation and formulate a recovery strategy that minimises the risk of wrongful trading accusations. Failure to do so could result in the situation deteriorating and the risk of personal liability increasing.
We are a practice of insolvency practitioners, with years of experience rescuing and recovering insolvent businesses of all sizes and sectors. We are best placed to not only offer you advice on minimising the risk of wrongful trading accusations, but can provide a full array of rescue and recovery services in order to salvage the business and return it to profitability if at all possible. If your company has fallen into a position of insolvency, contact us today for free, professional advice completely free from obligation.