Trading when insolvent: The risks, law and legal implications
If your company is suffering financial difficulty and can no longer repay its debts, or the amount you owe is greater than the value of your assets, your company is classed as being insolvent under the Insolvency Act 1986.
In some cases, you can continue with day-to-day operations, which is known by some as ‘trading insolvent’. But it must be done with caution and under strict legal conditions. When trading insolvent, the responsibilities of directors shift. Directors have a duty to the creditors of the company and must ensure that they are acting in accordance with their fiduciary duties or they risk actions against them personally.
If it is deemed that directors are acting irresponsibly or contributing to the failure of the business, they can face serious legal and financial consequences.
What are the risks of trading insolvent?
One of the biggest risks of trading insolvent is increasing the Company’s debts, which negatively affects the outcome for creditors as this often reduces the return to creditors. Directors can be held personally liable for the company’s debts, and this can lead to director’s becoming personally insolvent as well as the Company, or disqualification proceedings limiting their ability to at as a director in the future.
Understanding insolvency laws in the UK
The UK Insolvency Act 1986 and Companies Act 2006 set out directors’ responsibilities when a company faces financial distress. Under these laws, directors are legally obligated to consider creditors’ interests.
If they fail to minimise losses to creditors or are found to be contributing to the company’s failure, then they could face wrongful trading charges. These charges can lead to severe penalties, such as:
- Personal liability for company debts
- Disqualification from acting as a director
- Fines
- In severe cases, imprisonment
Steps directors can take to avoid trading insolvent
Keeping a close eye on the company’s finances and conducting regular reviews of cash flow, liabilities and overall financial health can help avoid insolvency. It’s vital to seek legal and financial advice at the first signs of financial difficulty to help you make more informed decisions. The earlier you act, the more recovery options will be available to you, such as restructuring or administration. Which may allow the company to keep operating under the oversight of an insolvency practitioner.
Transparency with creditors is also essential, as honest communication can help build trust and may open the door to negotiated repayment plans or adjustments in terms.
Why choose Bridge Newland?
As a family-owned and fully licensed Insolvency Practitioner, Bridge Newland is committed to upholding the highest professional standards. Our team, comprised of highly skilled and experienced professionals, operates in strict accordance with the latest insolvency and restructuring legislation and best practices. We are dedicated to providing you with insolvency advice you can trust.
Our experienced team of Insolvency Practitioners can advise you at every stage of the insolvency and restructuring process. If you are unsure of your company’s solvency status, it’s crucial to consult an insolvency expert as soon as possible to ensure your company is acting lawfully. Speak to our expert Insolvency Practitioners today for a free initial and confidential consultation.
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