What does trading while insolvent mean?
This means a company is continuing its daily trading operations while it’s unable to pay debts owed, or having liabilities that outweigh assets.
What happens when an insolvent company continues to trade?
Section 214 of the company Insolvency Trading Act 1986
As the director of a limited company, you are protected by the law so long as you act responsibly and within the law. If you carry on trading while insolvent, the court could find you, the director of the company, guilty of Wrongful Trading under section 214 of the Insolvency Act 1986. The court may decide you are liable to make a contribution to the company’s assets, with the amount being compensatory rather than penal.
You may have to contribute to the company’s assets
If a court finds you guilty of fraudulent trading under section 213 of the Insolvency Act, the court might declare that any party who knowingly took part in carrying on business is liable to contribute to the company’s assets. This doesn’t only involve directors and officers – it applies to anyone carrying out the business’s duties in a fraudulent manner. Both a liquidator and administrator can bring this action.
Finally, a director is at risk of being disqualified under the Company Directors Disqualification Act 1986.
If you’re arrested or charged for fraudulent trading
If you are arrested or charged with an offence of fraudulent trading, it’s essential that you are represented by a skilled and experienced solicitor who knows this complex area of law. You can exercise your right to remain silent until you have the appropriate support team behind you. The sentence for fraudulent trading can incur a custodial sentence for 10 years in prison, so knowing the rules when going through company insolvency is crucial.
Trading while insolvent defence
In mounting a defence case, detailed information is essential. An insolvency practitioner can help pull this together, ready to work with a solicitor. Historical financial information as to how you saw the company’s financial status at the time of the alleged offences are important in mounting a defence, and sometimes the best result you will be able to achieve is damage limitation.
A defence team will view the company’s books and liaise with you to find out exactly what was going on at the time. The more financial information that is made available, the stronger the defence case.
If your actions were the result of unforeseen circumstances and difficult financial times, the judge may be more lenient. What’s more, the Covid-19 pandemic lead to changes in laws governing wrongful and fraudulent trading, so your solicitor may be able to use these laws to help you.
What your role was in the offence may also be considered. Directors who say they were unaware of their company’s financial status might still face some charges, since their job requires them to be the one in charge of their company’s financial data and assets. However, it could be possible to argue for wrongful rather than fraudulent trading. Since wrongful trading is a civil offence, unlike fraudulent trading which is criminal, the consequences may be less harsh.
Confused about the Insolvency Act or have more questions on company insolvency?
The Insolvency Act is highly complex and it is understandable if this complex area of law leaves you feeling confused. At BEACON LIP, we know the law inside out and are here to help guide you through the process. To find out more about how the Insolvency Act affects your business, or to speak about company insolvency, please contact us.