Trading whilst insolvent is a term referring to a company continuing to trade despite it being insolvent. If left unchecked, trading whilst insolvent or wrongful trading can lead to a director being held personally liable for the company’s debts after an inevitable insolvency appointment.

By knowing the warning signs of insolvency and what action they should take, directors can limit potential losses and longer-lasting damage.

How to know if a company is insolvent

Defined by section 123 of The Insolvency Act 1986, there are two ways of determining insolvency:

• Cash flow insolvency
  When a company can no longer keep up with day-to-day payments.
• Balance sheet insolvency
  The liabilities on the balance sheet outweigh the assets.

Liabilities resulting from legal action, including County Court Judgements (CCJs), that remain unpaid are another indication of insolvency.

While some companies may find themselves ‘balance sheet insolvent’, depending on their incomings and outgoings affecting cash flow, they may find that they can still function and trade efficiently, able to repay their liabilities when they fall due.

Directors should know when their company is insolvent and if there is no realistic way out of it without entering an insolvency recovery or closure process.

What to do if trading whilst insolvent, and how to avoid accusations of wrongful trading

To avoid accusations of trading whilst insolvent, it’s vital to seek insolvency advice as a company director. As soon as you’re aware that the company cannot meet its liabilities, you need to act and find the best solution for your company and its creditors before you face allegations of wrongful trading.

Directors have a duty of care to minimise creditor losses and should avoid doing anything to the creditors’ detriment, including:

• Taking company money to fund personal luxuries such as cars or holidays.
• Collecting an unreasonably high salary which the company cannot afford.
• Transferring assets from the insolvent company for free or significantly less than valued; attempting to exclude them from future insolvency proceedings.
• Paying certain creditors in preference to others.
• Collecting deposits from clients knowing that work can’t be completed.

One of the ways directors can ensure they act in the creditors’ best interests and minimise any damage is by speaking to a licensed insolvency practitioner, who can advise them of the best way forward. This could involve repaying what the company can afford as it continues trading via a formal repayment arrangement, or by closing the company and drawing a line under the insolvency through liquidation.

How we can help

If you think your business may be trading whilst insolvent, or you believe that might soon be the case, contact us as soon as possible and establish what you should do next.

Speak to one of our friendly, experienced, initial advisors for free, professional, confidential, and impartial advice with no obligation, and we’ll help you decide the best route forward. The faster you act, the smaller the risk of any accusations during any investigation. Depending on your company’s circumstances, we can either help with a recovery strategy or discuss company closure options.

Close the insolvent company

Sometimes, the company’s debts may be of such a level that it’s unfeasible or impossible to continue trading. In this case, you can choose to close the company through a Creditors Voluntary Liquidation (CVL). Closing the company writes off the unsecured debts and draws a line under creditor pressure.

When a company enters liquidation, the liquidator also investigates the conduct of directors who held office in the period leading up to the company’s demise.

Close and restart

If a director wishes to restart the company, and its core business is viable but creditor pressure threatens its future, it may be possible for the directors to close the insolvent company (oldco) and restart it in a new one free from the oldco’s debts (newco). Directors can do this via a pre-pack liquidation. This process allows the business to continue and can ensure a swifter, more secure transition to the new company. It also provides the opportunity for a better return to creditors.

A pre-pack liquidation is similar to a CVL but with the planned establishment of a new company to continue the business, potentially employing the same staff as the oldco. Before liquidation, the oldco’s assets are independently valued and purchased by the newco at market value. The oldco is closed with the remaining debt written off, and the newco starts trading. This process is sometimes referred to as ‘phoenixing’.

Repay your company’s debt in monthly instalments

Depending on the company’s circumstances, it may be able to repay its debts in affordable, monthly instalments. You can do this through a Company Voluntary Arrangement (CVA). The arrangement involves repaying your company’s unsecured debts, usually over a period of five years at a rate tailored to what the company can afford. Afterwards, the remaining debt is written off.

Restructure the company through administration

If your company’s debts are substantial enough that repaying them isn’t feasible and additional breathing space is required to resolve its issues, you could explore administration. Administration involves a licensed insolvency practitioner taking control of the company and restructuring it to make it more appealing to any potential buyers.

In summary

Trading whilst insolvent, wrongful trading, or a business’ inability to repay its creditors when repayments fall due is a serious issue. While occasionally, directors can find themselves unknowingly trading whilst ‘balance sheet insolvent’, the company must still be able to repay its debts on time. If the company cannot, the directors can face serious repercussions, such as incurring personal liability for company debts and possible disqualification from acting as a director for up to 15 years.

Case Studies

Derwent Castings Limited

Kelly Burton • Metals • Creditors Voluntary Liquidation (CVL)

Unsecured creditors owed money by a Derbyshire manufacturing company which went into liquidation are to receive a higher than the expected dividend of 60p in the pound.

A total in excess of £128,000 is due to be distributed to unsecured creditors of Whatstandwell-based Derwent Castings Limited, whose claims totalled over £192,000.

The company, whose roots date back to the 1940s, had traded profitably for a number of years but in late 2013 / early 2014 saw the cancellation of its largest sales contract which represented 70 per cent of its turnover.

Bosses at the company, which employed 16 staff including three directors, struggled to attract replacement business and had to drop prices. Further business was lost as a result of foreign competition.

Sheffield’s insolvency specialist Wilson Field was called in as liquidator and worked with the creditors’ committee of Derwent Castings Limited to secure the positive dividend.

Andy Wood, associate director and insolvency practitioner at Wilson Field said:

“Dividends for insolvent companies are generally low, or nothing, for a variety of reasons – cost of staff redundancies, difficulty collecting outstanding invoices, selling assets in a forced sale situation, selling specialist assets which have limited appeal to purchasers, deteriorating or perishable assets, as well as other costs involved.

“However, thanks to a very positive relationship with the creditors committee, I am delighted to return a healthy dividend to the unsecured creditors in the region of 60p in the pound.

“The supply chain is often greatly affected by a liquidation and in this case we have been able to help creditors.”

Derwent Castings Limited was incorporated in August 2002 and specialised in iron casting from the five-acre Derwent Foundry site at Whatstandwell near Matlock.

However, the iron founding operation at Derwent Foundry was first introduced back in 1946 by Wragg & Hawksley which produced cast iron pipes for the water industry.

In 1950 the foundry was acquired by WH Davis & Sons Ltd to supply castings for their railway wagon building business. Following a management buy out in 1984, the company was renamed Derwent Foundry Ltd and following its closure in July 2002, was bought by its present owners and renamed Derwent Castings Ltd.

Amongst jobs carried out on site were moulding using loose pattern and modern air setting (boxless) sand systems; metals work using the latest in electric induction melting producing a wide range of grey, SG and alloy irons; an independent Namas approved test laboratory, finishing, pattern making and machining facilities.

Statestrong Limited

Kelly Burton • Manufacturing • Administration, Creditors Voluntary Liquidation (CVL)

Insolvency experts Wilson Field has helped turnaround the fortunes of a loss-making manufacturing company in Lancashire providing a new future for its 80 employees.

Businessman Russell Blaikie acquired the struggling 40-year-old Statestrong Limited, headquartered in Lytham St Annes, through a pre-pack sale and has been able to help the company immediately utilising his expertise in manufacturing and management.

Arrangements for the purchase of Statestrong’s business and assets were negotiated by Sheffield business specialists Wilson Field who affected the sale shortly after being appointed.

The company, which manufactures and supplies aerosol and liquid products for use in health and beauty, household, automotive and industry globally, posted sales of £12m last financial year, but had suffered pressure from creditors with outstanding arrears.
The total value of the deal is undisclosed but includes the business and the assets of the company based on Boundary Road in Lytham St Annes and Tarporley in Cheshire, which will now trade as Statestrong Products Limited.

Mr Blaikie said:

“Transactions of this nature are sensitive and require careful handling. The team at Wilson Field provided exactly the right professional approach.”

Wilson Field’s insolvency practitioners Kelly Burton and Joanne Wright worked closely with Mr Blaikie along with senior corporate case administrator Gareth Kinneavy.

Kelly Burton, said:

“The company had a wealth of expertise but was straddled with financial liabilities which ultimately made its future questionable. Looking forward, a previously distressed business now has a viable future.”

M J Squire Limited

Kelly Burton • Construction & Engineering • Creditors Voluntary Liquidation (CVL)

A bespoke joiners and shop fitters in Sheffield, M J Squire Limited, had been in its trade for more than 30 years.

However, recently it has been forced to close due to the downturn in the construction and retail industry.

The company was located at Orgeave Close in Sheffield, after working for many household names over the years including House of Fraser, Levi’s, Austin Reed and Tommy Hilfiger.

Until 2014, it had been a profitable company but over the past couple of years, it had been unable to secure profitable contracts.

February 10^th, 2016 saw the appointment of Wilson Field’s Andy Wood and Robert Dymond as liquidators. This development for the company came as a result of suffering cash flow problems.

Operations at M J Squire Limited have now ceased and regrettably, all nine roles within the company were made redundant.

Andy Wood, insolvency practitioner from Wilson Field, spoke about his work on this case. 

“Declining sales at M J Squires significantly impacted cash flow and the business’ ability to meet its liabilities. In the face of tough market conditions, the director has taken the difficult decision not to continue trading. The business has closed and the assets are being sold.”

“It is very sad to see this well-known local business cease to trade after over 30 years. The downturn in the retail sector has hit this business hard.”

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