Managing a company can be stressful and problematic. Each year, thousands of companies run into financial difficulty. If you are in business and cash flow is a problem, you may have heard of and are possibly worried about “wrongful trading” or as it is sometimes known ”trading whilst insolvent”. It’s a complex subject about which there are many myths and rumours circulating.
The Insolvency Act 1986 imposes liability on directors if they should have realised that there was no reasonable prospect of avoiding an insolvent liquidation and they then failed to take every step to minimise loss to their creditors. A sudden end to trading can sometimes be more harmful to creditors than a period of trading while the best option is found. So in many cases it is not illegal to trade while insolvent. Frequently, the opposite is true and directors faced with insolvency could be culpable if they did not continue trading.
What the law regards as wrong is not simply trading while insolvent; it is concerned with the effect of continued trading under these circumstances.
However, there can be serious consequences if the Law is broken, with the main risk being that you could become personally liable for the debts of the business, even if your business trades through a limited company. You can be fined and could also be disqualified from holding office as a director for up to 15 years.