Trading Whilst Insolvent

Sometimes businesses can find themselves in a situation where they are trading whilst insolvent. But just what are the implications of this? Here, Jeremy Frost gives us a brief overview.

Jeremy, how does a business get into a position of trading whilst insolvent?

Running a business can give people the freedom of being their own boss and working with whom they want to work. Undoubtedly, running a business can be very rewarding. However, there’s an awful lot to learn and it can be tough. Often, when they set up, company directors know about a third of what they need to know and learn the rest “on the job”.  This is where the potential problems can arise.

How so?

In the context of trading whilst insolvent, debtors may not pay; underquoting; new entrants to the market, there’s a myriad of unforeseen expensive scenarios.

Do these issues fundamentally change the viability of a business?

Potentially. There’s no hard and fast test. If a business finds itself facing cashflow issues, it may still have a number of assets but be unviable, whereas a company with no assets remains viable. Relying on the sale of assets to get you through a tough patch may not be the best strategy.

What should a director do?

Pay attention to the numbers and take action accordingly. Do not let a situation go from bad to worse.  This will sometimes result in the necessity to stop trading. If you’re thinking that your business may be unviable it’s vital that you document the decisions you make to address the situation and these decisions should be made with the best outcome for creditors in mind.

Why?

You’ll need to demonstrate that you were acting in the best interests of the creditors and that you took steps to minimise the loss, otherwise, you as a director could be deemed to be personally liable for compensating the creditors and be disqualified as a director.

But aren’t directors protected from personal liability?

In usual circumstances, yes, but not if they cannot demonstrate that they’ve made responsible decisions in the best interests of creditors.

How can this be demonstrated?

Again, it’s about keeping a record of your actions and explaining why you took that action. We would encourage proper Board meetings with minutes where reasons for making decisions can be documented.

How can directors make the right decisions?

Look at the company accounts and refer to the content of cashflow forecasts and business plans to help manage the business and inform decisions. E.g. if the cashflow shows that the business needs £500k, demonstrate that you took steps to try to raise it. If you were unsuccessful but can clearly show you did everything possible to try and raise it, this could be a defence and be of benefit to you as a director.

Do directors always know that they’re trading whilst insolvent?

Businesses may try to solve the problem rather than look at the accounts to get a real view of what is going on. As a director you’re supposed to know! As soon as you suspect that there’s a problem, take advice. Taking advice early will protect directors and also avoid a situation spiralling out of control.

How can Frost Group help?

We have years of experience in this area and offer an advisory service to help make the right decisions that will be viewed favourably by the courts. As always, the earlier you contact us, the more we can do to help.  

All initial discussions are free and confidential.  We offer a nationwide service from our offices in London, Croydon and Bournemouth - just telephone our office on 0845 260 0101 or by landline 020 8915 1012 for professional and regulated advice.