Risks of Trading Whilst Insolvent
Many company owners and directors are unsure of their legal guidelines when facing up to a possible insolvency. Strictly speaking, it is not illegal to continue to trade a company which is insolvent. However, you must know that for you to continue trading in such a state, there must be:
- a strategy in place which is realistically achievable
- a plan that returns the company to profitability in the short term
Here at The Insolvency Experts, we understand that many owners and directors will want to fight to sustain their company’s future in any way possible, including exploring a brief period of trading whilst insolvent. Having advised many clients in the UK on such a process, we’re ideally placed to offer helpful guidance if you Contact us.
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4 Key Questions on Trading While Insolvent
How does it work for a company to trade 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.
What classifies as wrongful trading?
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 but continued on with trading while insolvent.
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, through 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.
What is meant by Misfeasance and Breach of Duty?
A lesserused 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 actions taken by directors. If proven, it 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 advice is acted upon and can limit the potential for personal exposure should the company eventually end up in a formal insolvency situation.
How do I select the right guidance on trading while insolvent?
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 by calling 0300 303 8284 or emailing us on firstname.lastname@example.org