Trading while insolvent can be a grave concern for directors in the current financial climate; there are many dangers that can affect directors of insolvent companies, some of which can lead to very serious and life altering consequences. It is important to be able to recognise the signs of insolvency and act upon them immediately in order to limit any damage to the business and director.
Firstly let’s explore exactly what being insolvent means for a business.
It can be established whether a business is insolvent or not by answering three simple questions.
- Can the company pay its debts as and when they fall due?
- Does the company owe to its creditors more than the worth of its assets?
- Has the company had any CCJ’s or statutory demands made against it?
If the criteria of these questions cannot be satisfied then the business is more than likely insolvent and urgent advice should be sought from a licensed insolvency professional. Even if just one of the criteria cannot be met it still indicates insolvency.
When an insolvent state is determined it is important to act quickly as it immediately opens directors up to a numbers of dangers.
A creditor with a personal guarantee will pursue the guarantee should a limited company find itself in financial difficulties. Whilst the life of a company might come to an end by way of formal insolvency procedures such as Creditors Voluntary Liquidation or being subject to a Winding-Up order, the creditor can still rely on the Personal Guarantee to look to recover any sums still outstanding from the person that gave that guarantee.
Directors may be prevented from holding a responsible post for up to 15 years if the Insolvency Service deems them unfit to be concerned in running a limited liability company.
Personal Liability for Wrongful Trading
Failure to take advice and implement appropriate procedures can make the directors potentially personally liable for the company debts as a result of the wrongful trading provisions in the Insolvency Act 1986<. The amount the directors are likely to be liable for if found guilty is the actual amount that creditors have lost as a result of continuing to trade when they should have known the company was incapable of surviving in its current format.
Recovery of an overdrawn Directors Loan Account and Dividends
If your limited company should enter into Liquidation, the Liquidator will look to realise any assets. It might not have occurred to you but if you have an overdrawn Director’s Loan Account, this will be considered an asset of the Company and will be vigorously pursued by a Liquidator for the full amount that is overdrawn.
Fines or Imprisonment
Breaking the terms of disqualification can impose a fine or imprisonment
If you think your business may be insolvent or if you have concerns regarding any of the possible dangers to directors above then it is important you seek professional advice as soon as possible. Focus Insolvency Group are licensed insolvency practitioners and are able to offer free impartial advice to business owners and individuals alike, contact us today.