Strictly speaking it is not illegal to continue to trade a company which is insolvent. However, there must be a strategy in place which is achievable and returns the company to profitability in the short term.
Trading whilst insolvent
Firstly, in this type of situation it is imperative that any decision by a board of directors to continue to trade an insolvent company are fully explained in writing with justification and reasoning. Additionally the directors must be aware that in the event of the company eventually entering a formal insolvency process their actions will be fully scrutinised by the liquidator or administrator and if it is concluded that the rationale was not sound they do face the potential for further action.
The most common action against directors in this type of scenario is that of wrongful trading. Wrongful trading occurs when it can be shown that director “knew” or “ought to have concluded” that a company was unable to pay its debts. If Wrongful trading is proven, then the directors can be held liable to pay compensation equivalent to the estimated losses incurred by the company from the point that they “knew” or “ought to have concluded” the insolvency of the company to the point of formal insolvency. Depending on the size of the company and length of time between the two, these losses could be significant.
Misfeasance and Breach of Duty
A lesser used method of obtaining financial recompense against the directors is that of Misfeasance or Breach of Duty. In certain circumstances when proof of wrongful trading cannot be obtained, the Misfeasance route can be pursued. Misfeasance is effectively the company suffering financially due to the actions taken by directors and if proven, can also lead to a financial penalty equivalent to the losses incurred by the company as a result of those actions. Overall, if the company is insolvent it is imperative that independent advice is obtained from the company accountant or insolvency experts. This will provide some level of protection for directors if the advice is acted upon and it can limit the potential for personal exposure should the company eventually end up in a formal insolvency situation.
Contact The Insolvency Experts for advice
For advice on trading whilst insolvent, or for more information on directors duties and help during the insolvency process, get in touch with The Insolvency Experts. You can talk to us directly for advice on what to do when dealing with insolvency on 0300 303 8284.