Putting Creditors First – A Condition of Trading whilst Temporarily Insolvent

Putting Creditors First – A Condition of Trading whilst Temporarily Insolvent

A Major Change in the Way You Run Your Company

When running a successful Limited Company your duty is to act in the best interests of the Company and its shareholders.  However, all that changes when it becomes insolvent, either unable to pay creditors as and when amounts are due or where your liabilities are greater than your assets.  From that moment on you are legally required as and when amounts are due to focus your efforts on attempting to repay your debts.

This article is intended to give a brief overview of some of the pitfalls that face you, but it must be emphasised that the contents is not to be considered as legal advice.  If you are facing the prospect of insolvency then you should seek professional help from an experienced insolvency practitioner.  This should be done as soon as possible to deliver the best outcome for both you and the Company.

Can I continue Trading?

In order to continue trading Directors must be sure that the following conditions are satisfied:

  • There must be a reasonable prospect of creditors being paid
  • The Company’s level of debt must not be increased in an attempt to solve the problem. There are legal consequences if this is ignored.

If you cannot fulfil these conditions you are strongly advised to consult an insolvency practitioner as a matter of urgency as the quicker you address the problems the better the result.  And remember ‘hope’ is not a word to use when calculating your financial situation!

Where could you go wrong?

‘The road to hell is paved with good intentions’ is a phrase you should bear in mind.  You want to save your Company and will be tempted to try almost anything to achieve it. 

The following is a brief description of some of the offences you could commit for which, if Insolvency follows, you could be legally liable and could have serious consequences.

  • Fraudulent Trading – if proven this could lead to imprisonment.
    • Unfair transactions – being paid for products/services that you will not deliver
    • Knowingly entering into contracts with customers which would lead to greater financial distress
    • Obtaining loans through the use of falsified information
  • Wrongful Trading – continuing to run your Company when you know that there is no real prospect of being able to avoid insolvency and Liquidation. The Courts have the power to disqualify you from acting as a director for any company for up to 15 years
  • Creditors Preference – You must act in the interest of all creditors and not choose to favour some over others. The Courts my set aside such transactions and require the funds to be returned to the Company, either by the creditor or you personally as the person who authorised the payment.
  • Misfeasance– Withdrawing funds from the company or using the company’s money other than for the business. If this is proven the Courts may require you to make a personal financial recompense.
  • Transactions at an Undervalue – It could appear to be an attractive option to raise funds quickly to pay creditors by selling company assets at below market value. If the court finds you guilty of this they may reverse it by ordering you, or the recipients of the assets, to refund the difference into the insolvent estate.

Who is Responsible?

While this article has focused on you the following are all under a legal obligation to act in the interest of creditors and what is described applies equally to them.

  • Directors registered at Companies House
  • Shadow Directors – These are individuals whose instructions and decisions the other directors accept and implement but are not registered

Next Steps

  1. If you find your Company insolvent but are confident that this is only a temporary state then make sure you keep a detailed record of all your decisions and transactions
  2. If you feel unsure about anything you are about to do then make contact with a professional insolvency advisor before making any transaction.

If you want to find out anything further about this subject then please feel free to call me on 01494 786000 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com

DISCLAIMER This blog / article is for information and interest only. It is not a substitute for full professional advice, which will take account of the specific and individual circumstances surrounding your matter. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.

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T: 01494 786000 - M: 07961 116321