Wrongful Trading

Trading When Your Company Is Insolvent

Although insolvent, trading as a limited company can lead to severe problems for directors and the company. Company Directors must legally ensure that creditor losses are minimised. So, if directors knowingly trade whilst insolvent, they face liability for the company’s debts.

What is trading whilst insolvent?

Trading while insolvent is when a limited company continues to trade, even though the directors know it has become insolvent and not viable.

Insolvency is not defined in the Insolvency Act of 1986. However, a company is insolvent if it: –

  • Liabilities exceed its assets – balance sheet test.
  • It cannot pay its debts as and when they fall due – cash flow test.

So, a limited company is insolvent if it fulfils one of these tests.

How do I know if my company is insolvent?

As per Section 123 of the Insolvency Act 1986, a company is insolvent if it cannot fulfil its daily obligations or if its liabilities outweigh its assets on the balance sheet.

However, being “balance sheet insolvent” does not mean a company cannot still operate. To do so requires its revenue cash to be more significant than its expenditure cash flow, and it can maintain paying its debts as and when they fall due.

So, signs of insolvency for a limited company include: –

They understand whether your company is solvent or insolvent.

If unsure, the team at HBG Advisory can evaluate your situation and advise you on your company’s viability and the way forward.

Trading When Your Company Is Insolvent. – What are the possible outcomes?

Once a limited company liquidates, the liquidator investigates the actions of directors who held office before the company entered liquidation.

The liquidator considers:

  • If directors had acted responsibly: –
    • before their appointment and
    • once appointed.
  • Whether directors have taken appropriate measures to mitigate creditor losses.

Once information is gathered, the liquidators report their findings to the insolvency service, which determines if action is required to investigate further or fine and then disqualifies directors.

Suppose there is evidence that directors have not exercised reasonable foresight or were judged irresponsible. Then, they may personally be liable for the company’s debt.

Furthermore, if the liquidator finds you have traded while insolvent, it could lead to accusations of wrongful trading.

So, company directors must be aware of the director’s duties and responsibilities.

What is wrongful trading?

Wrongful trading means directors continue to trade through an insolvent company while understanding the company is insolvent. Therefore, directors who have committed wrongful trading RISK THE PROTECTION of limited liability.

The government suspended wrongful trading laws in their attempts to fight the economic effects of the coronavirus COVID-19 pandemic. However, they re-introduced them on October 1st,2021.

What to do when trading insolvent

If you believe your limited company is trading whilst insolvent or could soon be, you must act quickly and determine your business’s solvency.

Make contact as soon as possible; depending on the circumstances of your company; we can either help with a recovery strategy or discuss options for closing your business. Talk to one of our friendly, experienced initial advisors for free, professional, confidential, and impartial advice without obligation, and we will help you decide the best route forward. The sooner you act, the smaller the risk of any accusations during any investigation.

How do I protect myself as a director?

For a responsible company director to avoid allegations of insolvency, it is crucial to seek insolvency advice.

As soon as you know you cannot meet your liabilities, you must find the best solution for your company and its creditors.

Once a company director becomes aware their company is insolvent, they have a duty of care to minimise creditors’ losses. Directors should therefore avoid doing anything that could be detrimental to the creditors of the company, including:

  • Purchasing personal items like cars or holidays.
  • Paying yourself a high salary, which the company cannot afford.
  • Transfer of assets from the insolvent company for free or significantly less than valued; attempting to exclude them from future insolvency proceedings.
  • Paying creditors in preference to others.
  • Taking deposits, knowing you will not deliver the purchased item of service.

Company directors face disqualification if proven they have acted wrongly.

How does HBG Advisory help?

If you have an insolvent limited company that cannot repay its liabilities, please contact the team at HBG Advisory on 0800 612 5448, asking for John Waller. We will help you deal with your company’s current issues.

  • Close the insolvent company
    • Debts of a company can be so high that it is impossible to continue trading. Therefore, you can choose to close the company via a Creditors Voluntary Liquidation (CVL). Doing so writes off the associated debts.
  • Repaying your company’s debt in monthly instalments
    • Subject to the company’s debt volume, you may pay it back in affordable, monthly instalments. This can be done through a voluntary arrangement referred to as company voluntary arrangement (CVA), which involves the monthly repayment of your company’s unsecured debts over a period, up to five years of your company’s unsecured debts. Any remaining debt is written off.
  • Restructure with a company administration
    • If your company’s debts are significant, so repayment is possible, you could consider administration. A company administration requires a licensed insolvency practitioner to take control of the company and restructure it to attract buyers.

In summary

A grave issue is trading whilst insolvent or a business’s inability to repay its creditors when repayments fall due. While occasionally, directors can unknowingly trade, while “balance sheet insolvent”, the company must repay its debts as and when they fall due. If the company cannot, directors can have dire consequences, such as personal liability for company debts and a 15-year ban from acting as a director.

Book a Virtual Meeting - Free Confidential Advice
If you need help understanding the best way forward for your company, we can provide confidential free initial advice. You can book a free virtual meeting or call us on 0800 612 5448..

Bounce Back Loan advice for Company Directors

Directors should seek professional advice if they have Bounce Back Loan worries regarding repayments. The UK government introduced the COVID-19 support scheme to support businesses through the pandemic. owever, repaying the loans has been difficult. So ensure you seek advice sooner than later.
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