UK: Trading Insolvent – What Are Your Legal Duties As A Director?

Last Updated: 11 November 2016
Article by Jameson Smith & Co

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 insolvent:

  • 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.

If any of the above apply to your current situation then you are at serious risk of further action being taken in the form of a winding-up petition. For this reason, it's essential you act quickly and seek professional advice to try and resolve the situation. This could take the form of an informal creditors' agreement, a company voluntary arrangement (CVA), a creditors' voluntary liquidation (CVL), an administration, or simply restructuring or refinancing the business. Once the petition is advertised, it might be too late.

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 creditors

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 £750 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 trade.

What must company directors not do while trading insolvent?

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 wrongful trading.

  • Attempt to repay debts through dishonest transactions

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 value

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 not others

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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