What is Trading Whilst Insolvent, Wrongful Trading, and Fraudulent Trading?
The Insolvency Act section 1986 outlines trading whilst insolvent, wrongful trading and fraudulent trading as terms determining a state of trading. It’s essential that you, as director, are aware of these and manage your company properly.
Wrongful trading and fraudulent trading can all result from your company trading whilst insolvent.
- Trading Whilst Insolvent
Your company would be trading whilst insolvent if it continues trading if it can’t retain its repayments to creditors as and when they fall due or if the liabilities on its balance sheet outweigh its assets. Respectively, these are ‘Cash Flow Insolvency’ and ‘Balance Sheet Insolvency’. - Wrongful Trading
Wrongful trading occurs when you choose to continue trading through your insolvent company despite knowing that it is insolvent. Doing so worsens the company’s position and that of its creditors. - Fraudulent Trading
Fraudulent trading is when you continue trading through your insolvent company to deliberately deceive and defraud its creditors and customers, continuing to take deposits and orders while knowing that you cannot deliver.
What are the consequences of trading whilst insolvent, wrongful trading, and fraudulent trading?
The consequences of trading whilst insolvent, wrongful trading and fraudulent trading vary in severity, but all carry potential issues for directors.
- Potential consequences of trading whilst insolvent
If you know your company is trading whilst insolvent, and it is not a situation where the business can continue or recover, you run the risk of wrongful or fraudulent trading and potentially longer-lasting effects.
More on Trading Whilst Insolvent - Potential consequences of wrongful trading
Committing wrongful trading could result in the creditors’ position worsening. If that company enters liquidation, the insolvency practitioner will look into your actions as a director leading up to and during the process. If there is evidence of wrongful trading, you could face disqualification from being a director for up to 15 years. You could also be made personally liable for the company’s debts.
More on Wrongful Trading - Potential consequences of fraudulent trading
Fraudulent trading is a criminal offence. If found guilty and proved to the Insolvency Service, that director could be held personally liable for their company’s debts, disqualified from being a director, and even receive a prison sentence.
More on Fraudulent Trading
How can I avoid trading whilst insolvent?
To avoid trading whilst insolvent and subsequent accusations of wrongful or fraudulent trading, you should avoid acting in ways that would worsen your creditors’ position.
This action could include, but is not limited to:
- Still taking deposits
Collecting deposits from clients and customers, knowing that work can’t be completed. - Excessive director salary
Taking a salary that the company can’t afford. - Creditor preference
Treating creditors in preference to others, including paying some before others. - Inappropriate use of company money
Using company funds on personal luxuries: cars, holidays, etc. - Transactions at an undervalue
Transferring assets from the insolvent company at a lower than market value, or even for free, to exclude these from insolvency arrangements.
If your company is facing financial difficulty, you should speak to us as soon as you’re aware that your company is insolvent. Our licensed and regulated insolvency practitioners (IPs) can provide free, impartial, confidential advice with no obligation, and inform you of the options available. Which is best for your company will likely depend on its circumstances, including its level of debt and number of creditors.
Failing to do so and continuing to trade risks worsening the situation and puts your company at greater risk of being accused of wrongful or fraudulent trading.
How we can help if you’re worried about trading whilst insolvent
If you’re a director worried that you’re trading whilst insolvent or that you could be accused of wrongful or fraudulent trading, speak to us without delay. We can assess your situation, provide free, confidential advice, and outline the appropriate insolvency solutions to your company with no obligation. As licensed insolvency practitioners, we can carry out the below procedures to help your company:
- Repay your company debts in a payment plan via a Company Voluntary Arrangement (CVA)
A CVA is a payment plan between a company and its creditors that allows you to restructure your company’s unsecured debts while continuing to trade by making affordable monthly payments over a fixed period. We start by assessing your company’s financial position and determining a realistic repayment amount. These terms are then proposed to your creditors, and if approved, your company enters the repayment plan. When in place, all interest and charges are dropped and creditors in the arrangement cannot take further legal action. The process lasts for up to five years, and on successful completion, any remaining unsecured debt in the arrangement is written off.
More on Company Voluntary Arrangements - Restructure your company through administration
Administration is an insolvency procedure for companies that are insolvent. Entering the procedure, your company will be in a temporary state of protection by a moratorium that halts creditor action, including legal proceedings, giving your company the breathing space to continue trading. We will act as administrator, and our primary purpose is to rescue your company as a going concern, attempting to restructure and turn it into a leaner, more profitable organisation. If rescuing the company isn’t a viable option we will also look at the most appropriate exit strategies from administration, whether that be a potential sale of the business, assets, the whole company, or transitioning to an alternative insolvency procedure.
More on administration - Close your company down via a Creditors Voluntary Liquidation (CVL)
A CVL is a liquidation procedure for companies that are insolvent. The process will formally close and liquidate your company, ceasing its trading operations, realising any assets and removing the threat of creditor legal action. If your company has employees, they can claim for redundancy and other statutory entitlements through the government’s Redundancy Payment Service (RPS). The process is final and irreversible. Once completed your company’s unsecured debt will be written off, and the company is dissolved, allowing you, the director to move on.
More on a Creditors Voluntary Liquidation - Close your company down and start again via a pre-pack liquidation
A pre-pack liquidation is a type of CVL where the sale of your company’s assets is arranged before liquidation, allowing business operations to continue seamlessly under the purchasing company. The company name may be reused, and employees can transfer under TUPE. Contracts and essential agreements can also be included as part of a sale, ensuring minimal disruption to your business operations. This process eliminates the unsecured debts of your previous company, providing a fresh start free from previous unsecured liabilities.
More on pre-pack liquidation
How to get in touch with us: The next steps for engagement
- Speak with our initial advisers
Make contact with our team, via phone, filling in a form, or online chat. We will assess your circumstances and, if suitable, arrange a free consultation with a consultant to discuss your company’s situation. - Initial assessment
During the consultation, we will advise if an insolvency procedure is the most appropriate route forward or whether alternative solutions better suit your company’s problems. - Formally engage with Wilson Field
If there is an appropriate insolvency solution, we will confirm the necessary steps to start the procedure and will issue you with the relevant documentation for you to formally engage us.
In summary
Your company is trading whilst insolvent if you continue trading whilst knowing that the company cannot afford to repay its liabilities. It can lead to accusations of wrongful or fraudulent trading. Continuing to trade without taking insolvency advice can worsen both your company’s position and that of its creditors, potentially resulting in director disqualification or personal liability.
You can help prevent the situation from worsening by taking free, impartial, confidential advice from us. Our insolvency practitioners can guide you towards the solution that is best for you and your company.
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