What Are The Rules On Trading While Insolvent?

a man holding open an empty wallet

If your business is unable to pay its debts but continues to operate as normal then you could be trading while insolvent. Though it can be tempting to do this and attempt to keep bringing money into the business, serious action can be taken against you if you are found to have been trading while insolvent. Directors can be held personally liable and the liquidator will be obliged to investigate, so you must fully understand the rules on trading while insolvent before making any decisions about the best course of action for your business.

Can You Trade While Insolvent?

Insolvent companies are obliged to put the interest of creditors first which means that trading while insolvent is a serious civil offence in the UK. 

Trading while insolvent can quickly become fraudulent trading if directors behave unethically to try to recover. For example, insolvent businesses may show preferential treatment to certain creditors which will leave others out of pocket and may sell business assets for less than their true value to deliberately stop assets from going to creditors. This is illegal and therefore and criminal offence.

What Does The Law Say About Trading While Insolvent?

The rules on trading while insolvent are laid out clearly by the Insolvency Act 1986. Company directors should be aware of these rules if liabilities are greater than assets, including the idea of wrongful trading. Covered by Section 214 of the Insolvency Act 1986, wrongful trading is when a director continues to allow the business to trade despite having an awareness that there is little to no prospect of the company being able to avoid insolvent liquidation. 

The liquidator will look for a number of different signs to determine whether a business or its directors are guilty of wrongful trading, including taking credit from suppliers with no intention to repay.

The Consequences

Should the company enter into an insolvency process like creditors voluntary liquidation, the nominated insolvency practitioner will be required to fully investigate director conduct and check that wrongful trading did not take place at any point.

If found guilty of failing to take appropriate measures to present insolvency or worse, guilty of wrongful trading, directors can face serious repercussions. They may be held personally liable for company debts from the point of insolvency and no longer be able to serve as a company director. These bans can last for up to 15 years.

If a company director is found guilty of fraudulently trading while insolvent then they may also face a prison sentence.

How To Get Help

If you think your business is insolvent but are not sure what to do, it is not worth running the risk of trading while insolvent. Instead, you should always consult professional help at the first signs of difficulty or trouble.

The expert insolvency practitioners at My Liquidation can provide you with trustworthy and honest advice to help you understand the best course of action for your business. This may include recovery strategies or the recommendation that you enter into the insolvency process as quickly as possible. Get in touch with the team today to discuss the position of your company. 

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