There are significant legal and financial risks for company directors if they allow a company to continue trading when insolvent. Ins ome cases, insolvency is clear cut but in many situations, a ccompany can hover between solvency and insolvency for a significant period of time.

The guidance below sets out specific legal risks of insolvent trading. To minimise risks the key things are :

  1. To get professional advice at an early stage – unless you completely ignore the advice, especially if you are advised that your business is insolvent, , you are likely to have a decent amount of protection.
  2. Not to make things worse – however bad things may seem, you can make them a lot worse by trading when clearly insolvent which also often leads to taking even bigger risks such as taking money out of the business or even committing fraud.

Dealing with a situation where your business is potentially insolvent is one 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 is when a company continues its day-to-day operations even though directors are aware that the company can’t pay its debts, or has liabilities that outweigh its assets.

Is my Company Insolvent?

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

If you don’t have enough money to make repayments but business debt remains small and you are still otherwise trading successfully, it may be possible to continue trading without breaking the law. 

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

Laws Concerning Trading Whilst Insolvent

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

The following are examples of actions which are extremely risky for directors and not only constitute insolvent trading if the company is insolvent, but also possible civil and/or criminal liability :-

  • 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.