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A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for directors to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.
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Transcription
Welcome to Dissolve This video addresses issues about a very common area of concern for directors and that's Insolvent Trading; So what is Insolvent Trading? - Let's have a look at a definition "If a company is insolvent and the directors continue to incur new liabilities, then the director can be personally liable for those new liabilities" So let me make two points First, yes, your house is on the line Secondly that action can be taken by each of: the Liquidator a creditor or even ASIC So the concept is pretty straightforward but it does get complicated One of the main complications is figuring out whether or not your company is insolvent. There is a lot of case law on that topic but we've tried to make it easy for you Have a look at our page Is my company insolvent? You can get there by using the URL on the screen behind me or if you are watching this from our website then you'll see the button on the right hand side of this page Let have a look at some technicalities. Number 1 -- you're only liable for debts incurred after the date of insolvency, so thats not all debts; Number 2 -- you will have some defences, they're a little complicated so I wont go into that in any detail now So here's some tips for you if you are concerned your company might be trading while insolvent. Firstly, do what the law says, which is don't incur new debts if you can't pay for them How do you do that -- the easiest way is to move to a COD basis Or if you do incur new liabilities, make sure you pay for those ones first. Finally an extra tip for you If you think you have a viable business that is just suffering some short-term difficulties, you might want to consider a Voluntary Administration. We have a separate page and video on that topic. Thank you.
UK law
Under UK insolvency law, trading once a company is legally insolvent can trigger several provisions of the Insolvency Act 1986, including:[1]
- Wrongful trading – Section 214
- Transaction at an undervalue – Section 238
- Preferences – Section 239
- Extortionate credit transactions – Section 244
A limited company becomes insolvent when it can no longer pay its bills when due, or its liabilities—including contingent liabilities such as redundancy payments—outweigh the company’s assets. This is a critical point in the lifespan of a company as it denotes when the directors' responsibilities move from the interests of shareholders to the interests of creditors. It also means that the directors need to be extremely careful when considering whether to continue to trade, or not. Any director who knows that the company is insolvent and makes the decision to continue to trade, and in doing so increases the debts of the company can be made liable for the company debts.[2]
In the UK, directors are exposed in respect of transaction at an undervalue, preferences, and extortionate credit transactions if the transaction occurred: a) while the company was insolvent; and b) within 2 years before the onset of liquidation if the transaction was with a connected person, and 6 months if the transaction was with an unconnected person.
Directors who continue to trade while insolvent may face disqualification under the Company Directors Disqualification Act 1986.[3] Under the provision of this act, when a company goes into liquidation, the liquidator must make a report to the Disqualification Unit of the Department for Business, Innovation and Skills on the conduct of all directors. If the liquidator has come across any conduct which makes the director unfit to be involved in the management of a company in the future (which things would include trading while insolvent) the Department for Business, Innovation and Skills will apply to the Court for an order disqualifying the director or directors from acting as a company director for a certain period of time.
Other countries
Many other countries have similar laws, often referred to as 'insolvent trading' or wrongful trading.
See also
References
- ^ "Insolvency Act 1986" (PDF). Insolvency.gov.uk. UK Statutes Crown. Archived from the original (PDF) on 9 July 2011. Retrieved 29 July 2014.
- ^ "Trading whilst insolvent". Retrieved 14 November 2016.
- ^ "Company Directors Disqualification Act 1986". legislation.gov.uk. Crown. Retrieved 30 July 2014.
This page was last edited on 22 April 2022, at 13:52