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The Risks of Trading Insolvently

Trading whilst insolvent puts you at risk. This can have serious financial and legal consequences for you as a director. Protect yourself today.

When a company can no longer pay its debts or when a company’s debts outweigh its assets, it is classed as insolvent. When a business is in this position and continues its day-to-day operations, it is ‘trading insolvent’.

The responsibilities of a director change when their business is trading insolvent. At this point, their duty is to the creditors of the company and therefore directors need to be very careful in that they are acting in accordance with their fiduciary duties.  If directors are found to have acted irresponsibly or contributed to the company’s failure, they can face serious consequences. This can bring various legal and financial consequences.

“Is my Company Insolvent?”

It is relatively common for those involved in the running of a business to be unaware of its solvency. This is particularly common where good accounting practices are not followed. Generally, the easiest way to determine insolvency is:

  • Your business can no longer meet financial obligations such as basic expenses and loan repayments.
  • On your balance sheet, your liabilities outweigh your assets.

If you are unsure of your company’s solvency status, it is important to consult financial experts to find out quickly and avoid any nasty surprises, reach out to us today for your free company health check.

Insolvent Trading vs Wrongful Trading

These two terms are often thought to mean the same thing but they are different. Insolvent trading involves continuing to trade whilst insolvent. If you believe your business can recover, continuing to trade can be an option but, can also be a risk.

Wrongful trading is when a company in insolvency continues to trade and directors either:

  • Knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.
  • Did not take “every step with a view to minimising the potential loss to the company’s creditors.”

If a business enters formal insolvency, directors’ conduct will be investigated, and this could lead to wrongful trading convictions. This can see directors face legal and financial penalties, including being made liable for company debts.

James Bell

Chief Finance Officer

I had been struggling with complicated…

I had been struggling with complicated financial issues and didn’t know where to turn for help. That’s when I came across Bell & Co. From start to finish, the service they provided was outstanding. Firstly, the team was very knowledgeable…

I had been struggling with complicated…

I had been struggling with complicated financial issues and didn’t know where to turn for help. That’s when I came across Bell & Co. From start to finish, the service they provided was outstanding.

Firstly, the team was very knowledgeable and empathetic. They took the time to understand my situation and worked with me to come up with a plan that suited my needs. They explained everything in a clear and concise way, which made the process a lot less overwhelming.

Secondly, the level of professionalism displayed by Bell & Co. was exceptional. They kept me informed throughout the entire process, and I never felt like I was left in the dark. Any questions I had were answered promptly and efficiently, which made me feel confident in the decisions we were making.Finally, the results of their help were amazing. Bell & Co. helped me to get back on track financially, and I’m now in a much better position than I was before. I can’t thank them enough for their help and support during this difficult time.

Overall, I would highly recommend Bell & Co. to anyone who is struggling with financial problems. Their team is knowledgeable, empathetic, and professional, and they provide excellent solutions that truly make a difference. Thank you, Bell & Co., for all your help!

Michael Smith – GB

Have you Wrongfully Traded?

It can be difficult to tell if you have been trading wrongfully but there are a few common mistakes that can cause issues down the road. These include:

  • Not filing accounts and other documents at companies house
  • Building up HMRC arrears such as PAYE, NIC and VAT
  • Taking salary, dividends or loans from the company when insolvent
  • Taking loans that could never reasonably be paid back
  • Making preferential payments to creditors or other directors

What Are The Consequences of Insolvent and Wrongful Trading?

When a company enters formal insolvency such as liquidation, the events leading up to this will be investigated. This includes the conduct of the directors. If, as a result of this investigation you are found to have acted irresponsibly, you can face a range of penalisations including:

  1. Personal Liability – You could be made personally liable for some, or all, of your business’ debt. These can include any liabilities. Recently, there have been several cases involving Bounce Back Loans (BBLs) that have seen directors penalised in this way. If you are unable to pay this, you could face the repossession of assets or even bankruptcy.
  2. Financial penalties – You could be issued with financial penalties, fines or compensation orders if you have not carried out your duties properly.
  3. Legal action – As a director, you can face legal action ranging from disqualification as a director to criminal charges and even imprisonment. This depends on the severity of your misconduct.

What to do if Your Company is Trading Insolvently

If your company is insolvent or you believe you may be trading insolvently, the first thing you should do is consult a business insolvency specialist. This will prevent any missteps that could land you in trouble. Beyond this, directors must ensure that they carry out their statutory duties and act in the best interests of creditors.

Bell & Company offer a free initial case review to establish your financial position and determine your best options going forward. Contact us today to speak to one of our experienced specialists.

Contact us today to speak to a business debt specialist.

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