The definition of an insolvent company is one which can't
pay its debts as and when they fall due; or, one with assets that
are exceeded by its liabilities on the balance sheet. If either of
these is true of your company then it could well be insolvent. But
what is the likely impact of insolvency in real terms? If any of
the following are true then your business is likely to be
The business is unable to keep up
with its financial obligations and makes frequent late payments to
HMRC and other creditors;
The value of all the company's
assets i.e. bank accounts, debtor book, equipment, property etc. is
less than its liabilities i.e. current and future debts;
The company has already received a
statutory payment demand or has a county court judgement (CCJ)
against its name.
However, before you start looking for a way out of insolvency,
it's essential you fully understand your duties and
responsibilities while in charge of an insolvent business.
Otherwise, you could be disqualified as a director for a period
of up to 15 years and be made personally liable for a proportion of
the company's debts.
The obligation to act in the best interests of your
It is not actually against the law to continue doing business
when you are insolvent. However, this only applies up until a
certain point. If you owe a creditor more than Ł750 and have
failed to pay a 21-day statutory demand, legally you
should pay the creditor or cease trading. At this point, you are
legally obliged to act in the best interests of your creditors. If
you do not, you run the risk of being accused of wrongful trading.
If you have not been issued with a statutory demand then the
situation is different. In this case, as long as you make every
effort to repay your creditors and there is a realistic prospect of
doing so in the near future, your company can continue to
What must company directors not do while trading
A director of a company that is trading insolvent could be
disqualified as a director and be held personally liable for
company debts if they:
Continue to trade with no intention
of repaying their creditors
Directors who enter into contracts and trade with no intention
of repaying their existing creditors could be found guilty of
Attempt to repay debts through
Directors who try to repay debts through dishonest and
potentially fraudulent means, such as entering into new contracts
with insufficient funding, could be convicted of fraudulent
trading. Those directors could be held liable for company debts and
even face a seven year custodial sentence.
Selling assets at less than market
Some directors attempt a quick sale of company assets at less
than market value to raise the capital they need to repay their
debts. However, such transactions can be reversed by the court and
directors can be ordered to refund the proceeds of the sale.
Making payments to some creditors but
The directors of a company are obliged to act in the best
interests of their creditors as a whole. This means all creditors
must be treated in the same way, so preferential payments cannot be
made to certain creditors in favour of others. It can be tempting
to repay debts you have personally guaranteed or make payments to
connected third parties, but the court can order the creditor to
refund the payment.
How can we help?
A company insolvency is undoubtedly a stressful time and these
legal responsibilities and duties can seem like a lot to take in.
However, with the right guidance you can avoid any potential
penalties such as a director disqualification or personal liability
for company debts. For more information about how we can facilitate
the best possible outcome for your insolvent business, please get in touch with our team.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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