It’s an unfortunate reality, especially in difficult times that any SME could find itself insolvent. This isn’t necessarily the end of the world. Properly managed, a business can survive insolvency or, at worst, the owner can walk away sadder and wiser. Improperly managed, though, you could find yourself in serious trouble.
A company is insolvent when either it can’t afford to pay its bills by their due dates or when its total liabilities are greater than the total value of its assets — or both. In the long run, it may be possible to negotiate agreements with your creditors, or restructure your debts in such a way as to make the company viable again. However, as soon you realise you’re insolvent, it’s vital to stop trading at once.
Any director of a company is expected to be aware of its financial position at all times. Claiming you were unaware that the company was insolvent will not only do you no good, but you’ll also be laying yourself open to charges of negligence, irresponsibility or unfit conduct.
What Is Fraudulent Trading?
If you continue trading in the knowledge that you’re insolvent, this could be judged either wrongful or fraudulent trading. The lesser charge of wrongful trading is a civil offence, but fraudulent trading leaves you open to criminal prosecution.
Fraudulent trading is when you attempt to defraud creditors by accepting credit from suppliers you can’t pay back or payment from customers for orders you can’t fulfil. Hiding your financial problems to improve your position before liquidation can also be an offence, and this may include selling off company assets below market value.
The Consequences of Fraudulent Trading
If your company is liquidated, the Insolvency Practitioner must send a report to the Secretary of State, including information about the conduct of directors. If there’s evidence that any director has deliberately attempted to avoid payment of company liabilities, the Insolvency Service will investigate.
As with any criminal charge, intention to defraud must be proven. If a director is found guilty of fraudulent trading, they can be fined or liable to other financial penalties, as well as being disqualified from acting as a director. In serious cases, the court can also impose a prison sentence.
Manage Your Insolvency
To avoid charges of fraudulent trading, it’s vital take the appropriate steps if your company becomes insolvent. You need to consult a specialist advisor, but I’m always happy to informally chat to clients about their options.