Trading while insolvent: what are the rules?

Your company is insolvent when it can’t pay the amounts it owes. If you’re struggling financially, get in touch with us sooner, rather than later, to help prevent your company from slipping into insolvency.

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Trading while insolvent: what are the rules?
Trading while insolvent what are the rules

Your company is insolvent when it can’t pay the amounts it owes. This can mean that the liabilities (things you owe) on your business balance sheet exceed the assets (things you own), or that you can’t pay your supplier bills when they’re due.

If this happens, it could mean that you and your fellow directors become personally liable for debts incurred by the company – removing some of the benefit of your limited liability.

What should you do if your company becomes insolvent?

One of your responsibilities as a director is to stop the business trading when the company becomes insolvent. It’s right and proper to cease trading if you know the company is not in a position to pay its bills or settle its debts.

But there are rules around how you do this:

  • It may be that you and your fellow directors believe that you can turn the situation around – but you can’t just do this blindly. If you want to carry on trading, it’s imperative that you record the decision to do so in writing, setting out your reason for continuing to trade. This provides some protection in the event that the initiative fails, and the company is placed into liquidation.
  • Continuing to trade if you and your directors know (or ought to have known) that there’s no reasonable prospect of the company avoiding insolvent liquidation is a civil offence. This is known as ‘wrongful trading’. If proven, you may be personally liable to cover any losses. This liability would kick in from the point at which you knew (or ought to have known) that the company was insolvent, up to the point it ceased trading.
  • Signs of potential insolvency to look out for can include:
    • Difficulty paying your company’s bills on time
    • Breaching your bank’s overdraft limits to pay overdue bills
    • Growing overdue amounts owing to HMRC
    • Increased reliance on business loans from banks and other lenders
    • Other signs of financial strain or a lack of cashflow.
  • Ignoring the signs, or deliberately not looking for them, is no protection. As a director you’re presumed to be familiar with all aspects of your business.
  • You need to avoid giving undue preference and, by doing so, unfairly benefiting some creditors at the expense of others. An obvious example is to pay amounts due to your directors or connected companies before paying HMRC, or suppliers with longer-outstanding debts. It can be more subtle, for example, favouring suppliers you may wish to deal with in a future business over those you won’t need. This can relate to payments made up to two years before formal insolvency proceedings are started.

How can insolvency affect your long-term business plans?

What happens if your company does become insolvent? And how does this affect your long-term plans and strategy for the affected business?

It could be that you don’t believe you can turn the company around by trading out of a short-term difficulty. If this is the case, you need to consider either putting the company into liquidation, or entering into a company voluntary arrangement.

Although wrongful trading is a civil offence, if there is intent to deceive and defraud creditors and customers, this can be considered to be fraudulent trading – this is a criminal offence.

Talk to us about how we can help you avoid or deal with insolvent trading

Having monthly or quarterly management accounts prepared helps you spot the early warning signs of potential insolvency. If you rely solely on your annual accounts, this can be a case of ‘too little, too late’. We’ll help you produce regular accounts to monitor your financial health.

If you’re seeing signs of financial strain in your company, talk to us about ways we may be able to help you deal with the situation. And get in touch sooner rather than later.

If necessary, we can put you in touch with an insolvency practitioner, who can implement other actions such as:

  • Putting the company into administration
  • Setting up a company voluntary arrangement
  • Managing the liquidation of the company.

The earlier you talk to us, the less drastic any required solution may be.

The earlier you talk to us, the less drastic any required solution may be. Get in touch today.

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