The Risks of Trading Insolvently

When a company can no longer pay its debts or when a company’s debts outweigh its assets, it is classed as insolvent. When a business is in this position and continues its day-to-day operations, it is ‘trading insolvent’.

The responsibilities of a director change when their business is trading insolvent. At this point, their duty is to the creditors of the company and therefore directors need to be very careful in that they are acting in accordance with their fiduciary duties.  If directors are found to have acted irresponsibly or contributed to the company’s failure, they can face serious consequences. This can bring various legal and financial consequences.

“Is my Company Insolvent?”

It is relatively common for those involved in the running of a business to be unaware of its solvency. This is particularly common where good accounting practices are not followed. Generally, the easiest way to determine insolvency is:

• Your business can no longer meet financial obligations such as basic expenses and loan repayments.
• On your balance sheet, your liabilities outweigh your assets.

If you are unsure of your company’s solvency status, it is important to consult financial experts to find out quickly and avoid any nasty surprises, reach out to us today for your free company health check.

Insolvent Trading vs Wrongful Trading

These two terms are often thought to mean the same thing but they are different. Insolvent trading involves continuing to trade whilst insolvent. If you believe your business can recover, continuing to trade can be an option but, can also be a risk.

Wrongful trading is when a company in insolvency continues to trade and directors either:

• Knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.
• Did not take “every step with a view to minimising the potential loss to the company’s creditors.”

If a business enters formal insolvency, directors’ conduct will be investigated, and this could lead to wrongful trading convictions. This can see directors face legal and financial penalties, including being made liable for company debts.

What Are The Consequences of Insolvent and Wrongful Trading?

When a company enters formal insolvency such as liquidation, the events leading up to this will be investigated. This includes the conduct of the directors. If, as a result of this investigation you are found to have acted irresponsibly, you can face a range of penalisations including:

1. Personal Liability – You could be made personally liable for some, or all, of your business’ debt. These can include any liabilities. Recently, there have been several cases involving Bounce Back Loans (BBLs) that have seen directors penalised in this way. If you are unable to pay this, you could face the repossession of assets or even bankruptcy.
2. Financial penalties – You could be issued with financial penalties, fines or compensation orders if you have not carried out your duties properly.
3. Legal action – As a director, you can face legal action ranging from disqualification as a director to criminal charges and even imprisonment. This depends on the severity of your misconduct.