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Trading whilst insolvent

Trading whilst insolvent is a legal term referring to a business continuing to trade, despite being insolvent. It can lead to much bigger problems later down the line. Directors have a legal responsibility to keep losses to creditors at a minimum and as such, if directors knowingly trading whilst insolvent, they could incur personal liability for company debts.

What is trading whilst insolvent

Trading whilst insolvent refers to when a company continues to trade despite the fact directors know the company has no future and has become insolvent. There are two ways of defining insolvency, either when a company can no longer keep up with day to day payments, or if liabilities on the balance sheet outweigh assets.

What are the consequences?

When a company enters a liquidation procedure such as compulsory or creditors voluntary liquidation, the liquidator will carry out an investigation into the conduct of directors who held office, in the period prior to the demise of the company.

The purpose of this investigation is to ensure that directors have acted responsibly and whether they took the appropriate action to mitigate creditor losses. The information gathered during this investigation will be collated and presented to the insolvency service. They will then be responsible for deciding whether any further action or punishment is needed for the directors.

If there is sufficient evidence that directors could have exercised a reasonable degree of foresight or have acted irresponsibly, they may find themselves personally liable for company debt. It may even lead to the insolvency service issuing a disqualification, which can result in individuals being banned from acting as a company director for up to 15 years.

trading whilst insolvent

How to protect yourself if trading whilst insolvent

To try and avoid any accusations of trading whilst insolvent, as a company director it’s vital to seek insolvency advice. As soon as you’re aware you cannot meet your liabilities, you need to work on the best solution moving forward.

Once a director becomes aware their company is insolvent and they have a duty of care to minimise creditor losses. Ways to minimise creditor losses could include placing the company into administration or creditors voluntary liquidation. To protect themselves, directors should avoid doing anything which could be to the detriment of company creditors, including:

  • 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.
  • Collecting deposits from clients, knowing that works won’t be completed.
If directors are found to have acted wrongly, they could face disqualification.

How do I know if my company is insolvent?

Defined by section 123 of The Insolvency Act 1986, a company is deemed insolvent, if it can no longer meet its day to day obligations, or if on the balance sheet, its liabilities outweigh its assets. Some companies can regularly find themselves insolvent, as depending on how your incomings and outgoings affect your cash flow, you could be balance sheet insolvent, yet able to function and trade efficiently.

Common indications of insolvency are typically when a company is failing to pay its creditors on time, or when there is a build up of county court judgements.

What to do if trading whilst insolvent

If you think you may be trading whilst insolvent, it’s crucial that you act as quickly possible by contacting us for professional advice. If the business is struggling to manage the day to day activities, it’s crucial to establish if the business is insolvent or not. This will give you a clear indication as to what options could be available to the company, whether it is a rescue or company closure procedure. The faster you act the more it reduces the risk of any accusations during an investigation.

In summary

Trading whilst insolvent is a serious issue and if the company fails the directors can face serious repercussions. This can result in them incurring personal liability for company debts and possibly being disqualified from being a director for up to 15 years. On occasion, directors can find themselves unknowingly trading whilst insolvent, as they believe there is a chance the business could still turn around.

How we can help

If you’re worried that you are trading whilst insolvent, or believe that your business could become insolvent, then you must take action quickly. Depending on the circumstances of your company, we can either help with a recovery strategy, or discuss through company closure options. We operate nationwide and offer a free face-to-face consultation.

Authored by Lisa Hogg

Lisa Hogg

Director & Licensed Insolvency Practitioner