What does trading while insolvent mean?
As a company director, it’s crucial to understand the basics of insolvency law, so that you can stay on the right side of it.
In the vast majority of cases we deal with, the company director has done their best for the company, its shareholders and its creditors. But unfortunately, in a few cases, misunderstanding or mishandling of a director’s responsibilities can have legal and financial consequences.
What ‘trading while insolvent’ means
‘Trading while insolvent’ refers to a situation where a company continues to operate and incur further debts, despite being unable to pay its existing debts when they’re due.
This condition falls under the UK’s insolvency law, which views these actions as a breach of a company director’s duties. Essentially, this is because when you continue to trade in insolvent conditions you may expose your company’s creditors to further potential losses.
It’s important to note that trading while insolvent is a civil offence, rather than a criminal one.
What can cause trading while insolvent
Several factors can lead a company to fall into an insolvent position. Poor financial management, cash flow problems or extreme situations, such as unforeseen business circumstances or an economic downturn, could all mark the beginning of the path to insolvency.
Some common signs that your business is in financial distress might include:
- Difficulty paying creditors.
- Overdue tax obligations.
- Inability to pay employees on time.
- Consistently operating at a loss.
If these conditions persist and your company still can’t meet its debt obligations, it may be seen to be insolvent.
If a director is found to have been knowingly trading while insolvent, they could be held personally liable for the company’s debts and face a potential ban from acting as a director. Insolvent trading can also ruin a company’s reputation, leading to loss of business.
Addressing your insolvency early
If you suspect your company might be approaching insolvency you must act proactively, to uphold your responsibilities as a director.
Here are the key steps you need to take:
- Do a financial assessment: Monitor your company’s financial health to identify the issues and put measures in place to resolve them.
- Seek expert advice: A licensed insolvency practitioner can help you understand your financial position and guide you on the best course of action.
- Take action: If insolvency is inevitable, a formal insolvency process could help. This might be a solution like a Company Voluntary Arrangement (CVA) or administration, which are both designed to rescue businesses where possible.
- Be transparent with your creditors: Talking to your creditors about your company’s financial challenges could lead to agreements that extend payment timelines, for example. These are conversations a licensed insolvency practitioner can help you navigate.
Trading while insolvent support
If you’re having trouble paying your debts and you’re concerned about trading while insolvent, the first step is to contact us as soon as possible. As licensed insolvency practitioners and business rescue experts, we’re best placed to advise you on your options.
When facing the seemingly overwhelming prospect of business insolvency, it’s crucial not to panic. Remember: insolvency doesn’t necessarily mean the end of the road for your business. With careful planning and professional assistance, your business could recover and find future success.