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Directors Trading While Insolvent

Trading whilst insolvent is a legal term referring to a business continuing to trade despite being insolvent. If unaddressed, it can lead to much bigger problems later down the line. Directors have a legal responsibility to keep creditor losses to a minimum. As such, if directors knowingly trade whilst insolvent, they could be held personally liable for company debts.

Si importantly understand  what is insolvency and take professional advice sooner than later if in doubt.

Trading whilst insolvent explained?

Trading whilst insolvent: is when a limited company persists trading despite the company directors being aware of the insolvent position of the business. 

So to understand if a limited company is insolvent is measured by two methods.

  • CASH FLOW INSOLVENCY: Should a limited company remain unable to pay debts as and well they fall due;
  • BALANCE SHEET INSOLVENCY: Referring to the company balance sheet may identify company liabilities exceeding its assets.

How to identify if a company is insolvent?

Defined by section 123 of The Insolvency Act 1986

A limited company considered insolvent can no longer:

  • meet its day-to-day debts as and when due;
  • balance sheet, its liabilities exceed its assets.

However, companies may still trade under certain circumstances where they are insolvent by their balance sheet but have a good cash flow, pay debts when due and reduce the deficit on their balance sheet.

Identifying signs of insolvency include;

  • inability to pay its creditors when due; 
  • County Court Judgements (CCJs);
  • HMRC debt accruing;
  • unable to pay wages/salaries;
  • Bank bouncing cheques.

Producing a statement of affairs.

A statement of affairs is similar to a balance sheet. It is at a set date and shows the assets and liabilities at the current realisable value enabling to understand the financial position of a limited company at a given time.

What are the possible outcomes?

When a limited company enters liquidation, be it a 

Then the liquidator conducts an investigation into the former conduct of directors before their appointment.

The liquidator evaluates:

  • Action taken if any to mitigate creditor losses;
  • directors conduct before the company’s insolvency.

Once forwarded to the insolvency service, the information allows them to decide if further action is needed.

So should it be evident the directors acted irresponsibly, then they may find themselves personally liable for their company’s debt. The insolvency service wishes to issue a disqualification order, therefore banning the directors from acting further as a company director for up to 15 years.

So being guilty of trading whilst insolvent however, may then risk charges of wrongful trading.

Directors Trading While Insolvent and how to safeguard yourself?

For a company director to remain safe while trading and avoid accusations of trading whilst insolvent, it’s vital to seek insolvency advice as a company director. As soon as you’re aware you cannot meet your liabilities, you need to hwover find the best solution for your company and its creditors.

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

  • Take deposits when you know you will not perform the sale;
  • Paying yourself a high salary when unable to pay company debts;
  • Moving company assets undervalue or for free to newco;
  • Buying non-essential items when unable to pay obligations such as cars;
  • Preferential treatment to certain creditors with payment.

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