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Trading Whilst Insolvent 

Guide to Trading Whilst Insolvent

Is trading while insolvent a criminal offence that will lead to directors’ disqualification?

Trading whilst insolvent is when a business trades knowing it is insolvent, but maintains trade. To do so may be deemed a breach of the Insolvency Act 1986. Therefore, it is essential to take care of and know the risks if your business is struggling financially. 

Company directors of a limited company remain protected from the result of a failed company by the veil of incorporation. However, this only applies if you acted reasonably, responsibly and within the law. 

Failure to do so could personally make directors liable for the debts of the company. 

Since the Coronavirus COVID=19 pandemic, the UK government has introduced emergency legislation as part of an aid package to help businesses in the UK.

As part of that legislation, the government relaxed its rules regarding wrongful trading of a limited company. They believed this would help directors maintain trading, even though their position was unclear, and therefore not risk personal liability. However, since the 21st June 2021, the position was reverted back and returned to the norm. Therefore, directors are back at risk. So it is important to understand any potential for directors’ liabilities.

Operating when Insolvent

What are the main areas Directors need to be aware of?

 The 1986 Insolvency Act:

  • Wrongful trading – Section 214;
  • Transaction at an undervalue – Section 238;
  • Preference – Section 239. 

A company is insolvent, and directors continue to trade risks. The company’s directors are personally responsible financially. They may have to contribute to any deficit due to their actions, while knowing of the company’s insolvency.

So, therefore, the corporate veil in the United Kingdom can be lifted and the director’s protection removed. You may face wrongful trading allegations and directors disqualification.

How do I avoid personal liability?

IMPORTANT: Directors must be up to date on the financial status of the limited company. 

Ensure you have regular minuted board meetings to review the companies’ position, advising all company directors of the financial situation. Imperatively ensure an accurate, true cash flow statement is maintained daily, enabling directors to make decisions.

Without such action, you will fail to confirm why you continue to trade and face severe criticism, should your company fail.

Suppose the company’s performance continues to weaken, and for example. If redundancy payments can’t be made, then the directors need to consider:

Directors remain at risk if they carry out undervalued transactions and consider preferences. This may be: 

  • while the company was insolvent; 
  • Within two years before the liquidation;
    • if with a connected person;
    • Six months if with an unconnected person.

Since the introduction of the Bounce Back Loan. Many directors are now concerned about the implication of not repaying the loan.

We are often asked, can i liquidate with an unpaid bounce back loan?

Knowingly trading while insolvent?

To knowingly trade while insolvent puts a director at risk of disqualification if the company enters liquidation as per the Company Directors Disqualification Act 1986.

Therefore. When a limited company commences liquidation, once appointed. As part of all appointed liquidators duties. They must submit a confidential, online report to the Disqualification Unit on the directors conduct for three years before their appointment, including resigned or shadow directors. The report details the conduct of all directors or shadow directors (de facto directors and their liabilities) of the company before the liquidator’s appointment.

Known as a “D report“.

If the liquidator discovers fraudulent trading or behaviour that makes the directors unfit to be involved in the future management of a company. Then the DBERR (formerly DTI) may appeal for an order disqualifying the director or directors for up to 15 years.

Directors disqualifications are rare, however, except for severe cases. The Act enables a “fast track” approach, allowing directors to admit their acts, allowing lower penalties, including shorter directors bans.

How to avoid trading whilst insolvent, wrongful trading and possible personal liability?

Directors should carry out their director’s duties and responsibilities in a lawful manner.

When a company faces cash flow issues, they must ensure they:

  • Hold meetings weekly evenly daily, depending on the severity of the cash flow. Make full notes, especially on the rationale for decisions made.
  • Prepare financial information such as cash flows, P & L account and balance sheet movements:
  • Arrangements with creditors, considering a CVA, 
  • Introduce new money (subject to viability), 
  • Defer salary payments or reductions. 

However, should matters deteriorate beyond your control, then act quickly. Take advice from an Insolvency Practitioner today

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