What Are The Consequences Of Trading Whilst Insolvent?

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Are you the director of a business that is struggling financially? If you are running into financial difficulties, you may be wondering what the consequences are of trading whilst insolvent. The following guide looks at what it means to trade whilst insolvent, and what the consequences can be for directors and the wider company. Take a read below. 

What Does Trading Whilst Insolvent Mean?

If your company is insolvent, this means that it cannot pay its debts as and when they fall due. It often also means that the company’s liabilities outweigh its assets. So, trading whilst insolvent simply means continuing daily trading and operations as normal whilst the company is facing debts that they cannot pay off. 

Consequences Of Trading Whilst Insolvent

Trading whilst insolvent can lead to a breach of the Insolvency Act 1986, and can be considered as wrongful trading. In the case that a company continues trading whilst insolvent, the directors of the company may be made personally liable for the business’ debts. Directors have protection from the consequences of a failed company under ‘limited liability’ regulations, however this protection is only valid when the directors have acted reasonably, responsibly and within the legal regulations of insolvency law. In the case that directors fail to act on time and in a responsible manner, they can be made personally liable for the company’s debt. In the instance that wrongful trading has occurred, there may be grounds for the director to be disqualified. In order for directors to avoid breaching the conditions of the Insolvency Act, and to ensure that they are complying with legal regulations, it’s essential that they act responsibly at the first signs of insolvency

How To Avoid Personal Liability

Business woman looking stressed outAt the early stages of any signs of financial difficulty, it’s essential that directors act quickly and responsibly. If your company is insolvent, it is essential that the rights of creditors are prioritised. So, if you think your company may be insolvent, you should seek the guidance of a licensed insolvency practitioner as early as possible. You should not continue trading whilst insolvent. Seeking professional guidance early on, will provide you with greater options for your business, and ensure that you are protecting your personal position as a director, by complying with insolvency regulations. The best option may be to put your company into voluntary liquidation or use a company rescue procedure. This will help to relieve creditor pressure quickly, and deal with finances correctly and in the best interests of all parties. 

Knowingly Trading Whilst Insolvent

When a company is liquidated, a report must be provided by the liquidator to The Insolvency Service on the conduct of all directors. This is known as a “Conduct Report”. In the case that the liquidator has found evidence of wrongful trading and The Insolvency Service deems the directors to be unfit for the management of the company, there could be grounds for disqualification. This is why it’s so crucial to avoid trading whilst insolvent and instead seek alternative liquidation or business rescue options with the guidance of an insolvency professional.

The key point to take away from this guide is to always avoid trading whilst insolvent and to act responsibly at the earliest signs of insolvency. Don’t hesitate to get in touch with our experienced team of insolvency professionals at My Liquidation, to discuss the best options for your company.

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