None of us like to think of our companies facing insolvency, but unfortunately that can be the reality of business, especially at the moment. Record numbers of business insolvencies are being recorded, so it’s vital for Directors to be clear what they should and shouldn’t do — preferably before they’re faced with the choices.
What Is Insolvency?
Section 123 of the Insolvency Act 1986 sets out various conditions that allow the court to declare a company insolvent. Essentially, though, these all show the company to be incapable of paying its outstanding debts. For the purpose of the Act, a debt is taken to mean an undisputed sum of money that’s due.
One method is for a creditor owed more than £750 to have served a written demand on the company, which then fails to pay within three weeks. The court can also rule that the company is unable to meet the debt.
Even without a demand, the court can rule that the value of the company’s assets is less than the value of their liabilities. Any of these conditions can justify the court ruling that the company is insolvent.
What Should a Director of an Insolvent Company Not Do?
If a company is facing insolvency, there are four “deadly sins” that a Director might commit:
- Wrongful trading — This is when the company continues to trade when the Directors know there’s no reasonable prospect of avoiding insolvency, reducing creditors’ chances of recovering their money.
- Fraudulent trading — This is when a Director authorises the company incurring a debt in the full knowledge that there’s little chance of it being repaid.
- Preferences — This is when a Director is influenced in their actions by a desire to prefer one creditor over others.
- Transactions at an undervalue — This is when a Director arranges for the disposal of the company’s assets at less than the appropriate value.
How Can Directors Avoid Getting into Trouble?
There could be serious consequences for a Director who commits any of these “sins” when the company is facing insolvency. At the very least, they can be held personally liable for losses to the creditors, which could cripple their own finances. The Insolvency Service also has the power to disqualify a guilty Director from acting in the role in the future.
The best safeguard, if you find your company sliding towards insolvency, is to speak at once to an insolvency advisor. They’ll not only explain what you can and can’t do, but they might also be able to help you prevent insolvency altogether.
Or, to be more accurate, that’s the second-best safeguard. The best of all is to avoid becoming at risk of insolvency by ensuring a healthy cashflow. For this, you need to make certain most or all of your outstanding invoices are paid promptly. Give me a call to find out how I can help you avoid being tempted to commit the deadly sins.
