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Trading Whilst Insolvent - A Worried Director's Guide

Written by Keith Steven Managing Director 25 April 2022

A trading shop

Guide to Trading Whilst Insolvent

I have heard that trading insolvently is a criminal offence, which will lead to disqualification of the directors.

Trading whilst insolvent is a legal term used to describe a business which continues trading despite being insolvent.  This action can lead to a breach of several provisions of the Insolvency Act 1986. So, it is important to take care and know the risks if your business is struggling. In other words, that "veil of incorporation" can be lifted and the directors protection removed. You may face wrongful trading accusations and possibly even directors disqualification.

As a director you are protected from the consequence of a failed company, provided that you acted reasonably, responsibly and within the law. Failure to do so could make directors personally liable for the company's debt. 

It should be noted that due to the Coronavirus pandemic, emergency legislation had been enacted that allowed some relaxing in the rules surrounding wrongful trading.  However, this is no longer the case and directors can be sanctioned. 

The main provisions of the Insolvency Act 1986 that you should be aware of are:

If the company IS insolvent and if the board of the company continues to trade whilst it is insolvent, the directors of the company may become personally liable for the debt. The directors have a duty to act in the best interest of creditors and not make the situation worse.  As such, they should be taking advice on how to remedy the situation. This could involve putting the company into administration or liquidation.

How do I avoid personal liability?

Make sure that you read our guides to wrongful trading. You should also have up to date management accounts and financial information. It would make sense in such scenarios to have a daily cashflow model.

Secondly, make sure that you are fully aware of the current position: for example as a sales director you MUST know the financial position even if it's not your area of interest.

Have regular minuted board meetings to discuss the position, question the cashflow and numbers, and take decisions to act. This will help protect you and underpins why you were taking the decisions to continue trading.

If the company's performance continues to weaken, and for example the board cannot meet redundancy payments, then more radical surgery may be required.  This could be taking action such as putting the company into administration, or a company voluntary arrangement. If the company is not viable and cannot be restructured then liquidation is the answer.

The liability for other transactions only extends for a certain period of time prior to the company going into liquidation. Directors can be exposed in respect of the following; 

Transaction at an undervalue,

Preferences - for example if the transaction occurred: a) whilst the company was insolvent; and b) within 2 years before the onset of liquidation, if the transaction was with a connected person. If the transaction was with an unconnected person then it can be investigated for upto 6 months prior.

What if we have traded whilst knowingly insolvent?

Directors who continue to trade whilst insolvent may face disqualification under the Company Directors Disqualification Act 1986 if the company goes into liquidation.

When a company goes into liquidation, the liquidator must make a report to the Disqualification Unit of the Department of Trade and Industry on the conduct of all directors or shadow directors. This is called a "D report" and most often these are mildly negative or positive.

If the liquidator has discovered wrongful trading or conduct which makes the directors unfit to be involved in the management of a company in the future, then DBEIS may apply to the Court for an disqualifying order.  The directors will then be banned from acting as company directors for a set period.

It should be noted that directors disqualifications are still relatively rare (there are only around 1,000-1,500 per year).  However, due to some high profile disqualifications, they are much more in the public domain.

Government policy was also beefed up with the introduction of the Insolvency Act 2000. Part of that legislation was designed to speed up the disqualification process and increase the volume of directors disqualifications.

In a "fast track" approach directors can admit they have acted wrongly in return for lower penalties.

So what is your advice to avoid trading whilst insolvent, wrongful trading and possible personal liability?

If it smells off it usually is OFF is the best place to start!!

Acting sensibly, reasonably, and responsibly is always the best policy for directors of limited companies. If the company has cashflow problems then you must ACT.  So,

  • Hold meetings regularly,
  • Prepare financial information
  • Plan to do deals with creditors or a CVA
  • Introduce new money
  • Take salary sacrifices

These can all help, but if the business condition starts to worsen further, then ACT quickly, get professional advice and set out a plan.

We are happy to discuss the content of this guide with any director or advisor to a company, simply email help@ksagroup.co.uk or call free of charge on 08009700539

We are experts in business rescue, corporate rescue and company rescue, we can help sole traders, partners and directors.

Category: Worried Director What Will Happen To Me After Liquidation?

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