What Does Trading While Insolvent Mean?
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 a director becomes away that the company is officially insolvent, that primary responsibility shifts from shareholders to creditors.
In actuality, 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, as we shall discuss.
What are the Rules Surrounding Trading Whilst Insolvent?
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.
If you believe your company may be insolvent, we recommend using our simple and instant corporate insolvency test here.
Is Trading While Insolvent Illegal? What is the Law Surrounding Trading Through Insolvency?
The basic law is from Section 214 of the Insolvency Act 1986, Wrongful Trading. The key phrase for directors here is:
“at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation.”
This means that the director was aware of the situation, but chose to continue nevertheless. This means his actions did not put the interests of creditors first.
Where that can be proven the director can be convicted of Wrongful Trading which is a civil offence carrying penalties of directorial disqualification of 2-15 years, fines and, in severe cases, imprisonment.
Directors Risks While Trading Insolvent
Once a company is in liquidation, one of the tasks of the insolvency practitioner is to investigate the actions of the directors in the period prior to insolvency. This is the point at which wrongful trading is usually discovered, commonly by the IP hired by company creditors to get their money back.
For directors, one of the most serious consequences of wrongful trading may be the fact of being held personally liable for company debt. Whilst insolvency laws are generally there to keep a clear line between corporate and personal finances, wrongful trading is one of the rare instances where this veil can be breached.
Can a Company in Administration Continue to Trade?
When a company goes into administration it usually does so to allow for a period of restructuring, and with the hope that it will return to profitability. Because of this, trading administrations are common, meaning the business keeps on running as usual, with the intention of maintaining continuity.
Administration also places a legal ring fence (moratorium) around the company, to protect it from any creditor threats while the process unfolds.
Do You Need Help with Insolvency or Directorial Liability Charges?
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