In many cases tipping over into an insolvent position will mean ceasing trade immediately in order to shield creditors from any further losses. In some instances, however, it may be possible - and even advisable - for the company to continue to trade even when it is technically insolvent. This may be the case where continuing to trade in order to fulfil a certain contract would result in better overall returns for the body of creditors. Alternatively, where the company is going into administration and there is the potential for it to be sold as a going concern, continuing to trade while this deal is finalised is likely to preserve the company’s value, likewise resulting in a better return for creditors as a whole. What is key here, is that the decision to continue to trade while technically insolvent needs to be made by a licensed insolvency practitioner and not the company directors or shareholders. Company insolvency is a hugely complex area and falling foul of the laws and regulations surrounding it can have serious consequences for company directors. Liquidation and wrongful trading It is when a company’s financial situation takes it past the point of rescue that the issue of trading while insolvent can have serious repercussions on the company’s directors personally. Once a company enters liquidation, either voluntarily or by order of the court, the appointed insolvency practitioner or Official Receiver is statutorily obliged to carry out an investigation into the events leading up to the company becoming insolvent. This includes an investigation into the conduct of the directors which will typically cover a period of three years prior to the liquidation. If there is evidence that the directors were aware that the company was insolvent yet continued to trade as normal, and thereby potentially worsening the position of creditors, then this will be classed as wrongful trading. 24 LAWYER MONTHLY NOVEMBER 2023 The insolvency practitioner or Official Receiver will report their findings of wrongful trading to the Secretary of State who will then decide whether further action is required. Wrongful trading is covered by Section 214 of the Insolvency Act 1986 and is punishable by the following: • Personal liability for company debts: In some instances of wrongful trading, directors can be held personally liable for some or all the company’s debts. While a limited company is a separate legal entity from that of its directors meaning they will not ordinarily be held responsible for debts of the company, if a director is found guilty of wrongful trading, this limited liability protection can be removed. Depending on the financial position of the director, this could have a serious impact on their personal situation. An inability to repay the liabilities they become personally responsible for could mean their financial situation is compromised to the extent that personal insolvency options such as an IVA or even bankruptcy need to be considered in order to deal with the debt. • Director Disqualification Order: Directors found guilty of trading while knowingly insolvent can be disqualified from acting as a director for a period of between 2 to 15 years. A disqualification order also prevents an individual from being directly or indirectly involved with the incorporation, management, or promotion of a limited company or LLP during the length of the order. It may be possible for the director to agree to a voluntary disqualification undertaken as an alternative to a disqualification order. While a disqualification undertaking imposes the same restrictions and limitations on the director as a disqualification order, it will avoid court action and the associated costs. Wrongful trading vs Fraudulent trading It is also possible for directors to be found guilty of fraudulent trading if a court determines that trade continued past the point of insolvency with a clear intention to defraud creditors. Fraudulent trading is covered by Section 213 of the Insolvency Act 1986. Unlike wrongful trading which is a civil matter, fraudulent trading is both a civil and criminal offence and the potential consequences reflect this. As well as being made personally liable for the debts of the insolvent company, those found guilty of fraudulent trading can face a possible prison sentence.
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