Trading When Insolvent – Is it Allowed?

Trading When Insolvent – Is it Allowed?

When anyone starts a new business they generally don’t plan for their business to fail and face liquidation, but unfortunately it is a stark reality for many companies in today’s difficult trading environment.

The statistics though make for sobering reading with 4 out of 5 businesses failing to make it to the five year point. Consequently directors who plan ahead thoroughly will at least be aware of the challenges of insolvency and what liquidation could mean so that if those situations arise they can protect themselves and their fellow directors.

So what does happen when a company faces insolvency and can it continue to trade?

The short answer is that trading must cease when a company becomes insolvent. This means that as soon as a director has any indication that the company is insolvent he should stop trading immediately. If he continues to run the business knowing that the company is insolvent, even if he is not 100% sure, he will risk becoming personally liable for any debts from that point onwards. This puts not only the business at risk but also his personal financial situation, his home, and so on.

Of course there are always exceptions to every rule and for a company that is owned by one or two directors where the only debts owed are to the directors themselves then there is a fair argument to say that they can continue on as long as the support continues.

It can be a confusing situation for the new director and one that they really should not tackle alone.

“As soon as there are any worries that the company is insolvent we strongly urge directors to get professional advice,” says Lyndon Ogden, Director of Company Liquidation Services.

“Typical indications of insolvency are struggling to pay bills in full and on time and receiving harassing phone calls from creditors chasing debts. If you are in this situation there is no need to panic, but you must act straightaway to ensure that the situation can be handled as efficiently and positively as possible.”

If the company continues to trade while insolvent the directors may become personally liable for its new debts and it is likely that the Insolvency Service will become involved and investigate the management team. Directors can be disqualified for allowing their company to trade when insolvent, and this can have a massive impact on their future as businessmen.

It is important that any director whose business begins to struggle takes professional advice. Speaking to an insolvency or liquidation expert early can ease a lot of the stress and explain much of the confusion surrounding what can and can’t be done. Approaching someone who knows the laws inside and out can put minds at ease and help to make a difficult situation much more positive. In short, it’s important not to bury your head in the sand.

The truth is that insolvency and liquidation are not necessarily an automatic start to long-term financial or business problems. Directors of limited companies (as well as staff and shareholders) are not liable for company debts as long as they follow correct lawful procedures, so they are free to move on and start again; however they choose to do so.

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