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

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...