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When a company is insolvent company directors must prioritise the interests of the company’s creditors. If the company continues operating as normal this is known as trading while insolvent.
Trading while insolvent is unlawful and can have serious personal consequences for directors.
If you’re a director and you knowingly trade while insolvent, you can be held personally responsible for company liabilities and you can be disqualified from holding other directorships.
How do I know if my company is insolvent?
According to the Insolvency Act 1986, a company is insolvent if it can’t meet its day-to-day obligations.
- If a company has not paid a debt over £750 after being issued a statutory demand
- If a creditor has unsuccessfully taken enforcement action against a company (like CCJs)
- If a company is unable to pay its debts as they fall (the cash flow test)
A company is also insolvent if liabilities outweigh assets. This is known as the “balance sheet insolvency” test.
Ignorance is no excuse
“But what if I don’t know we are insolvent?”
As a director, you have a duty of care to act reasonably, responsibly and within the law. You are expected to behave in a ‘reasonably prudent’ way and should therefore be aware when your company is insolvent.
Even if you are a director with no direct responsibility for company finances, you need to make sure you are asking questions of your finance director or managing director, and making sure the company is solvent and can continue trading.
If a court concludes that you should have been aware that your company was insolvent then you may still be held personally liable for company debts.
What should I do if my business is trading while insolvent?
If you suspect that your business is trading whilst insolvent, or think this may soon be the case, you should act quickly to avoid personal liability.
It’s vitally important that you establish whether your business is insolvent. You may be able to do this yourself, but it is also worth speaking to an insolvency expert to get their opinion on whether or not your company is (or may soon be) insolvent.
A Licensed Insolvency Practitioner will also be able to advise on what steps to take next if you find out that you are insolvent.
Remember, the faster you act, the less chance you will face any personal liability.
For more information about company insolvencies speak to a member of the team today. Call: 0800 611 8888.