Trading While Insolvent: Can it be Done?

Insolvency can be a tricky problem to navigate, but UK company directors need to be aware of their duties if they are to avoid legal issues. Businesses trading while insolvent can get themselves into a whole host of legal problems, and it’s important that directors are aware of the implications their actions have.

We’ve collated some of the most common questions we’re asked around the subject of insolvent trading to create a guide to help UK business owners.

 

Can you trade while insolvent in the UK?

Technically, yes, though it’s an area with many caveats and ethical issues to bear in mind. In general, the only time you should consider trading while insolvent is if you have strong reason to believe that the insolvency will only be short term, and that carrying on trading will allow you to quickly resolve any outstanding debt.

Companies that find themselves in this situation shouldn’t take the decision to carry on trading lightly as there can be legal consequences. Those who think that they can trade their way out of insolvency will need to discuss their options with insolvency specialists beforehand to ensure that they stay on the right side of the law.

The real issues with trading while insolvent appear when directors continue to trade after they’ve already determined that they have little or no chance of avoiding closure.

 

Are there any instances that trading while insolvent is allowed?

On rare occasions, yes, but these must be carefully executed. Forbes Burton Business Advisor, Paul Turner explains that “sometimes it makes sense to allow a company to continue trading.

 

“A construction firm, for instance, may be close to finishing a large job that would return far more revenue than if they had their assets liquidated. This would make the repayment of all of its creditors far more likely and could even save the company from going under.

“Such cases are far from the norm, however, and would need the guidance and handling of an insolvency advisory firm to ensure that legalities are adhered to throughout. Any mistakes here can result in serious punishments, so it’s not worth the risk of trying to go it alone”.

 

What happens if you trade while insolvent?

You become vulnerable to a whole host of legal issues. Trading while insolvent allows a struggling business to accumulate even more debt as it receives materials from suppliers it can’t afford to pay, uses utilities such as electric and internet access from providers it can’t afford to pay, or takes orders from paying clients that it may not be able to fulfill.

 

Can you still trade while in liquidation?

No. A liquidation leads to a definite company closure. As business owners would be aware of the forthcoming closure, any trading during this time would be classed as wrongful, or even fraudulent trading.

 

What is wrongful trading in insolvency?

As discussed earlier, there may be instances in which a business owner sees an inability to pay their bills as purely temporary. This may be a result of poor cash flow or an unexpected large bill stretching a small cash reserve.

However, company directors have a duty to inform their creditors of any insolvency issues as a means of limiting their exposure to the risk that dealing with your business will now entail.

If a business fails to inform its creditors or contact a specialist insolvency advisor for guidance, it runs the risk of being accused of wrongful trading.

 

What is fraudulent trading in insolvency?

Fraudulent trading is deemed to have occurred when a business carries on trading while knowing full well that they can’t afford to pay off suppliers or even fulfill customers’ orders.

As you can see, the distinction here between wrongful and fraudulent trading is clear. Fraudulent trading is akin to stealing: products or payments are taken without any intention to pay or provide services that have been paid for.

 

 

Is trading while insolvent a criminal offence?

It can be, if deemed to be fraudulent trading. If it is assumed to be wrongful trading, it becomes a civil offence instead.

Both the Insolvency Act 1986 and the Companies Act 2006 class wrongful or fraudulent trading as an offence, and directors are expected to be aware of the seriousness of both. There is little leeway given to business owners that claim they didn’t realise their company was insolvent. As their company’s finances are one of the major things that a director should always be aware of, declaring an unawareness only serves to demonstrate negligence.

 

Are directors personally liable for insolvent trading?

Section 214 of the Insolvency Act 1986 states that both liquidators and administrators can claim against companies that are seen to have not acted in their creditors’ best interests.

Usually, these claims result in lengthy legal battles that can see directors made to personally repay creditors’ debts. If this isn’t possible, then assets such as the business owner’s home can be at risk.

On top of this, directors can be banned from acting as a company director for a maximum of 15 years.

A wrongful trading investigation also opens up the possibility of being investigated for fraudulent trading.

 

What is the punishment for fraudulent trading?

A prison sentence.

Not a particularly short one too. Fraudulent trading can result in prison sentences of up to ten years. It really isn’t worth the risk of trading while insolvent.

 

How do you prove insolvent trading?

While undoubtedly tricky, evidence can be compiled to show insolvent trading through looking at accounts. The Insolvency Service can conduct thorough research into a company to identify any wrongdoing.

 

What are the duties of directors trading while insolvent?

As stated by the Companies Act 2006, UK business directors have several duties to maintain while operating a company. These include such things as promoting “the success of their company” and exercising “independent judgement”.

However, when a business becomes insolvent, directors’ duties quickly change to prioritising its creditors’ interests. Among the methods designed to do this is the cessation of trading.

 

What is the time limit for insolvent trading?

There is no accepted ‘period of grace’ in which a business can trade after finding itself insolvent. As per the duties of UK business directors, they should take all routes available to ensure that their actions cause no harm to their creditors. In general, this means that trading should cease as soon as possible.

Forbes Burton Business Advisor, Paul Turner states that “even if directors think that their failure to pay bills is just a temporary blip, I would strongly suggest that they speak to a consultancy firm that specialises in insolvency cases such as ourselves.

“If your financial woes end up taking longer to fix than first anticipated, your continued trading could pose a problem in the eyes of the law. Something as small as a late or unpaid invoice can be the difference between steadying the books and being investigated for wrongful trading”.

 

Need help navigating possible insolvency?

UK businesses have had to contend with setback after setback over the last few years. Global pandemics, cost-of-living-crises, and energy price hikes have all contributed to making operating a business more difficult than it has been for some time.

If you’re concerned that your company will struggle to absorb these and other costs in the future, you need to seek help before it becomes an issue.

We have specialists on hand that can help you to facilitate turnaround strategies, sell your business, or close down your company depending on the best route available to you. Call us on 0800 975 0380, or email advice@forbesburton.com for a free consultation.