If our company is unable to make repayments and continues to trade is this against the law? A business acquaintance of ours told us we could get in serious trouble if we continue operating our business if we know we are insolvent. What kind of trouble can the directors of my company get into by not ceasing to trade as soon as insolvency is recognised? Does this means we have to stop trading just because we are in debt? As the owner of the company and a director, what kind of accusations could be made against me if I continue trading anyway?
It is not against the law to continue doing business when you don’t have enough to make repayments, up until a certain point. If the debt is worth more than £750, you have already violated the terms of the original loan agreement, have been issued an official 21-day payment demand and have failed to pay it within that timeframe, then legally you are expected to pay the creditor or cease trading. If you do not pay within the 21-day period the creditor can, and usually will, petition to force your company into compulsory liquidation through the court.
Now normally speaking the directors of a limited company cannot be held personally liable for the debts of the company, unless they are convicted of wrongful trading. After every liquidation, receivership, or administration procedure the administrator, receiver, or liquidator is required to perform an investigation to ascertain whether the directors of the insolvent company were guilty of wrongful trading while the company was insolvent.
Any time the directors do not act in the best interest of their creditors while insolvent they run the risk of being accused of wrongful trading. As long as you are making an effort to repay creditors and there is a realistic prospect of being able to so in the near future then your company can continue trading.
We can help minimise the risk of being held personally liable for debts with our on-call insolvency help and advice service. We may also recommend entering into administration voluntarily, a formal procedure in which an insolvency practitioner is appointed as the interim chief executive and is given the authority needed to operate the business long enough to repay creditors as much as possible and possibly work out an agreement through a CVA.
To learn more about what a director needs to do to stay safe during an insolvency procedure or while trading insolvent, click here to read about directors’ duties.
12th December 2018
Small and medium-sized enterprises (SMEs) across the UK are paying increasingly large sums of money to collect amounts owed to them by their clients and customers.Read More
4th December 2018
The number of independent retailers who closed down outlets during the first half of this year reached a record high level for any comparable period.Read More