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Trading whilst insolvent and wrongful trading

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trading whilst insolvent?

Andy Wood

Andy Wood

Licensed Insolvency Practitioner

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As director of a limited company, you will be aware that trading whilst insolvent can show signs of serious problems with your business. However, dependent on current circumstances, discovering that you are trading whilst insolvent can be a short-term worry or a major issue.

If you discover that you are trading whilst insolvent and you can see no immediate fix to this situation, then you should get in touch with us as soon as possible. We can offer you advice to help you deal with the problem while there are still options available to you.

What is trading whilst insolvent?

Trading whilst insolvent is a legal term which is used to describe a business continuing to operate despite its position of insolvency. Dependent on the overall circumstances of the business, it could lead to the breach of several provisions in the Insolvency Act 1986.

To be insolvent means that you are unable to meet your financial obligations, known as liabilities, as and when they fall due. There are two different tests to determine whether you are in an insolvent position, these are the cash flow test and the balance sheet test. You can find out more about this on our ‘Is my company insolvent?’ page. [LINK]

As the director of a limited company, you are protected via limited liability from the consequences of a failed company but it is important to recognise the signs if your business is struggling. If you do not act quickly and responsibly, you may be accused of trading in the knowledge that you are insolvent also known as ‘wrongful trading’.

As a result, you could be made personally liable for any debts from the point at which you were aware, or should have been aware, of your insolvent position. When you lose your limited liability and become personally liable, you will have to contribute to company assets, help meet any deficits to pay your unsecured creditors and you will potentially face director disqualification.

Wrongful trading vs. trading whilst insolvent

On the surface, these two phrases seem one in the same however there is a subtle but potentially crucial distinction between them that could make a big difference to your business.

  • Wrongful trading: This is when you trade when you are insolvent, you are aware of your position and you have no way of changing the situation in the immediate future. This is a very serious matter and will be dealt with as such.
  • Trading whilst insolvent: This can happen to a business at any point without causing any consequences or seeing the business enter insolvency proceedings. A business can go insolvent for a short period, for example when debtors pay late, but there is no intent by directors to act irresponsibly and the cash flow issue will be sorted when the payment comes through.

Limited liability: how to maintain it

The best way to keep hold of your limited liability status is to know what is happening in your company and act quickly to deal with any situations that may arise. You can do this by:

  • Keeping up to date management accounts and financial information
  • Making sure you are aware of your current position financially
  • Having regular board meetings and taking extensive minutes of these. In these meetings you will need to discuss your position, check your cash flow and take decisions on how to act. This is very important to help protect yourself, and any other directors, should you enter liquidation.

If after taking action to deal with your cash flow problems you remain in an insolvent position, you should cease trading and look into entering administration, a creditor’s voluntary arrangement (CVA) or liquidation.

What if I have traded whilst knowingly insolvent?

If you, as company director, continue to trade in the knowledge that you are insolvent and enter into a liquidation, you may face disqualification. When you enter into a liquidation, the liquidator will make a report on the conduct of all directors of the company.

If wrongful trading is discovered, then the director at fault will be considered unfit to be involved with the management of a company in future.

Remember as director of a limited company, you have a responsibility to all your creditors to act sensibly, legally and responsibly. If your company has cash flow problems, is no longer viable or is facing creditor pressure, you need to act fast while there are still a number of options available to you.

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