It’s often said that a company shouldn’t trade whilst it’s insolvent. Trading whilst insolvent, even knowingly, is not necessarily unlawful although it is, of course, far from desirable.
Certainly it is not recognised as unlawful by statute; indeed the Courts have recognised that there are times when it is perfectly proper for the directors of a company to take the view that the company should continue to trade out of its difficulties. What this means is that insolvency of itself does not necessarily signal that the company must immediately cease trading; there may still be time to find a solution to the company’s problems.
The Companies Act sets out the statutory duties of directors, which are to promote the success of the business for the benefit of its shareholders, taking into consideration the long-term consequences of decisions, and a range of interests (employees, suppliers, customers, the community and the environment), its reputation and fairness between shareholders. However, once a company is insolvent or in danger of becoming insolvent, in the “twilight zone”, then the directors must act first and foremost in the interests of the company’s creditors.
The risk of wrongful trading, and a potential exposure to the risk of directors becoming personally liable for some or all of the company’s debts, arises where a company goes into liquidation and it is deemed that the directors “knew or ought to have concluded” at some earlier date that the company had no reasonable prospect of avoiding liquidation.
The “get-out” clause for directors is that they will avoid liability if they can satisfy the Court that they have done all that they possibly can to minimise the loss to creditors. However, it is crucial to remember that directors’ actions will be judged with the benefit of hindsight, and what looks sensible or prudent at the time, might not look such a good idea months or years later. Questions that will be asked will include:
• Was there a genuine effort to trade?
• Did the company have a reasonable chance of succeeding?
• How quickly did the directors respond when they saw that things were starting to go wrong, and how did they know things were going wrong?
• Was it a commercial risk as opposed to mismanagement or incompetence?
• Was it a high risk, known to be so by creditors?
• For what period did the company trade after the directors knew, or should have known, that it was insolvent, with what effect and did they care?
Having a written plan, and recording decisions and the reasons for them in writing, is essential.
But carrying on trading when the company is insolvent is a big risk, and so taking sound professional advice at the earliest possible stage is vital. In fact, the Courts have decided that directors who carried on trade after taking specific professional advice were not liable for wrongful trading. At tri group we’re always happy to have an initial conversation without charge or obligation. So contact an experienced member of our Team today.