If you’re a director whose company is potentially insolvent, you’ll need to be very careful. Insolvency is a tipping point after which your responsibilities as a director change.
If you don’t demonstrate via your actions that you understand and are behaving in accordance with UK company law on this front, you may face consequences should the company go into liquidation.
Read on to find our more about how to protect yourself as a director.
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What Does Trading While Insolvent Mean?
Trading while insolvent means a company continues to operate as normal despite being unable to pay debts, or where corporate liabilities outweigh assets.
UK company law makes it clear that, after insolvency, a director’s responsibilities are to creditors, not shareholders. As such, any actions taken after becoming aware of the company’s financial situation must be in accordance with this.
If you suspect the company is insolvent, you should seek professional advice immediately. Don’t pay anyone, including yourself, or dispose of any assets. It would be wise to document all actions taken, including your justification for your actions.
If the company goes into liquidation, the Official Receiver or Insolvency Practitioner handling the case has a duty to investigate the actions of directors in the period preceding insolvency. Part of their responsibility to creditors is to check for any evidence of wrongful or fradulent trading on behalf of directors.
Wrongful Trading
Wrongful trading means that a director continued to trade with the result of failing to minimise the loss to company creditors when they should have done so.
The regulations around Wrongful Trading are laid out in Section 214 of the Insolvency Act 1986.
Section 214 defines wrongful trading as trading when a director “knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.”
So while trading insolvent could happen when the company is merely technically insolvent, but easily able to solve that when a big invoice is paid, wrongful trading means the sitution is permanent, and the director knows this.
What are the Potential Consequences of Trading Whilst Insolvent?
The IP’s investigation will examine:
- whether the director acted responsibily before the company went into liquidation
- whether the director took responsible steps to minimise losses for creditors
Where evidence of wrongful trading can be substantiated, directors can be held personally liable for company debts. This is obviously a more serious situation than merely insolvency, in which a directors assets would be traditionally protected by the corporate veil.
In serious cases, the Insolvency Service can even issue a director’s disqualification, meaning a ban of up to 15 years from serving as a director.
What to do if Trading Whilst Insolvent
- Take advice immediately from a licensed insolvency practitioner
- Don’t pay anyone or dispose of any assets
- Carefully document any actions you take as a director
- Don’t do anything which could negatively impact creditors such as taking money out of the company, paying one creditor ‘in preference’ to another, or collect money from clients for work that you know can’t be completed.
