Trading while insolvent – the key points to note

When a company fails and becomes insolvent it is inevitably a difficult period for its owners, its shareholders and of course, its customers.

Unfortunately, it can be the case that when an insolvent event is triggered, and the company continues to trade, a variety of questions begin to arise around the consequences for its directors and those who have sat round the boardroom table.

UK insolvency laws are historically far-reaching and complex. First and foremost, it is no surprise that wrongful trading is a statutory offence which forms part of the Insolvency Act 1986. A director can face substantial consequences if they decide to continue trading the business when insolvent or where there is a risk of insolvency, part of s214 of the Act. This can include a declaration by the Court that the relevant director must make a personal contribution to the assets of the organisation to pay creditors, with the sums determined by the Court.

Additionally, under s213 of the Insolvency Act, a director can be found guilty of fraudulent trading where the Court determines that any of the business was conducted with an intention to defraud its creditors. If a director is deemed to have had knowledge, and dishonesty is proven, they might also be found liable to contribute to company assets in order to pay creditors in the event the company is determined to be insolvent. However, a key difference between s213 and s214 is that this particular offence is broader and applies to anyone who was involved in carrying on the business fraudulently.

Other sources of directors’ liability Directors and officers can also be held liable for their failure to file for insolvency. It is also possible for directors to be found personally liable if there is a breach of any fiduciary duty, wrongful trading, fraudulent trading, or a contravention of environmental and health and safety legislation.

A whole host of other criminal sanctions can apply and disqualification from being a company director is possible for a period of up to 15 years.

The powers of directors and their options

Despite an investigation into their insolvent company’s dealings, a director may be uncertain around what powers they have following liquidation or other reorganisation proceedings. If there is to be a reorganisation outside of the formal insolvency process, then directors will retain their powers of management and their focus should be on ensuring a smooth and efficient restructuring.

A moratorium can act as a form of breathing space for the ailing company. Directors will retain general control of the company actions, however there will be a licenced insolvency practitioner who will be appointed in order to maintain a degree of oversight.

In the situation of a Company Voluntary Arrangement (CVA), directors will remain in control, albeit with the oversight of both the nominee and supervisor of the CVA.

When the company finds itself in the often-difficult position of being liquidated, the powers of the directors will end, unless the liquidator agrees following consultation with creditors and shareholders through formal channels.

Where the company is going into administration, the powers of the directors to exercise management functions or other actions that otherwise interfere with the powers of the administrator themselves, will end unless there has been prior consent by the administrator.

This is a deliberately brief summary of the process involved, the pitfalls, and the options available should a company find itself insolvent. It is a hugely complex area and one that requires accurate and intricate legal advice.

If you are looking for further information or advice, you can contact partner Sam Pedley in our Commercial Litigation department through samuel.pedley@mfgsolicitors.com, or call 01562 820181.