It is not actually against the law to continue doing business when you are insolvent. However, the leeway for insolvent trading only applies up until a certain point.
If you owe a creditor more than £750 and have failed to pay a 21-day statutory demand, legally you should pay the creditor or cease trading. At this point, you are legally obliged to act in the best interests of your creditors. If you do not, you run the risk of being accused of wrongful trading.
If you have not been issued with a statutory demand then the situation is different. In this case, as long as you make every effort to repay your creditors and there is a realistic prospect of doing so in the near future, your company can continue to trade.
Below are key areas of director responsibility when insolvent.
What must company directors not do while trading insolvent?
A director of a company that is trading insolvent could be disqualified as a director and be held personally liable for company debts if they:
• Continue to trade with no intention of repaying their creditors
Directors who enter into contracts and trade with no intention of repaying their existing creditors could be found guilty of wrongful trading.
• Attempt to repay debts through dishonest transactions
Directors who try to repay debts through dishonest and potentially fraudulent means, such as entering into new contracts with insufficient funding, could be convicted of fraudulent trading. Those directors could be held liable for company debts and even face a seven year custodial sentence.
• Selling assets at less than market value
Some directors attempt a quick sale of company assets at less than market value to raise the capital they need to repay their debts. However, such transactions can be reversed by the court and directors can be ordered to refund the proceeds of the sale.
• Making payments to some creditors but not others
The directors of a company are obliged to act in the best interests of their creditors as a whole. This means all creditors must be treated in the same way, so preferential payments cannot be made to certain creditors in favour of others. It can be tempting to repay debts you have personally guaranteed or make payments to connected third parties, but the court can order the creditor to refund the payment.
How can we help?
A company insolvency is undoubtedly a stressful time and these legal responsibilities and duties can seem like a lot to take in. However, with the right guidance you can avoid any potential penalties such as a director disqualification or personal liability for company debts. For more information about how we can facilitate the best possible outcome for your insolvent business, please get in touch with our team.