Directors who have been trading for many years become deeply accustomed to the concept of putting shareholders first. It is often a surprise, therefore, for them to realise that, at the point of insolvency, there’s a fundamental shift in responsibility.

As soon as directors become aware that the company is potentially insolvent, the primary responsibility to protect interests shifts from shareholders to creditors.

This moment of transition can be something of a grey area for directors, some of whom opt to continue trading despite the knowledge of their company situation. There are, however, strict laws around continuing to trade whilst insolvent.

Dealing with a situation where your business is potentially insolvent is 1 of the most stressful things in life. For small business owners, it’s likely you’ve spent years of extremely hard work building up your business. Reaching the point of insolvency is devastating but not a time to double down or make ill-judged mistakes.

At this critical juncture, it’s essential to get good, experienced advice on whether there is a risk of trading on and being found to have wrongfully traded while insolvent. We can help. Please do use the live chat or call or email us for a friendly, experienced sounding board

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What Does Trading Whilst Insolvent Mean?

Trading whilst insolvent means that a company continues its day-to-day operations when it is no longer able to pay its debts, or while having liabilities that outweight its assets.

Is my Company Insolvent?

You can find out if your business is insolvent using this free test.

At the moment of insolvency, a directors fundamental responsibilities change. They are no longer to shareholders but to company creditors and it is to protect them that the laws around wrongful and insolvent trading have evolved.

If you don’t have enough to make repayments but the debt remains small, it may be possible to continue trading without breaking the law. However where the following conditions are met, you must stop immediately and contact an insolvency practitioner.

(a) If your debt is greater than £750
(b) If you have violated the terms of a loan agreement already by not paying.

UK Insolvent Trading Laws

There are 4 key places whether the Insolvency Act 1986, the core document describing insolvency law in the UK, refers to trading whilst insolvent

  • Wrongful trading: Section 214 – This is where a director knowingly continues trading while recognising that the company cannot avoid insolvency.
  • Transaction at an undervalue: Section 238 – Where a director sells part of the company for less than its market value in the period preceding insolvency.
  • Preferences: Section 239 – Where a director shows preference to paying one individual over another, rather than putting the creditors as a while first.
  • Extortionate credit transactions – Section 244 – Whether credit from a finance provider has been obtained by a a director already aware of the company’s insolvency.

Is Trading While Insolvent a Criminal Offence?

Wrongful trading is a civil offence. Fraudulent trading is potentially a criminal one. With the more common wrongful trading the key legal requirement is not to continue trading where you know or ought to know that there is no reasonable prospect of avoiding liquidation.

In some situations, the issue of knowing your business is insolvent is very clear, in others not so and this is why experienced advice is strongly recommended.

Risks for Directors While Trading Insolvent

  • Carrying on trading with no intention of repaying
  • Attempting to repay debts through fraudulent means
  • Selling assets for less than market value
  • Repaying some creditors and not others

Penalties for Wrongful Trading

Company directors found guilty of wrongful trading could face disqualification as a director for up to 15 years, in addition to being held personally liable for some or all of the corporate debts.

Do You Need Help with Insolvency or Directorial Liability Charges?

Contact us for a free, no-strings-attached conversation in the strictest confidence. Use the live chat, or call 08000 746 757.