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Are you Trading while insolvent?

Is my business insolvent?

Your company is insolvent when it can't pay what it owes to people or businesses that you owe money to (creditors). The liabilities (what you owe to your creditors) on your balance sheet exceed the assets that the business owns, or you're simply unable to pay your creditor's bills when they're due i.e. your suppliers. If you run a limited company and you're trading while insolvent, you could find that you and your fellow directors become personally liable for the debts incurred by the company (one of the main benefits of running a limited company is limited liability). If you're a sole trader, then you're already personally liable for money owed to creditors and you could have to consider personal insolvency options (such as an IVA or bankruptcy).

What should you do if your company becomes insolvent?

One of a director's main responsibilities is to stop the business from trading whilst the company becomes insolvent if you're aware that the company is unable to pay its creditors. There are rules around how you do this and it's always best to speak to an Insolvency Practitioner or Liquidator for the best advice.

The steps to consider are:

  • If you and the other directors believe that you can turn the situation around and you want to carry on trading, then it's of the utmost importance that you record the decision in writing via a meeting of the Directors (it doesn't matter if you're the sole director of a company, the process still needs to be documented). You have to document the reasons for continuing to trade and how you're going to go about digging the business out of the hole. This will grant some protection should the business fail and the company is forced/ placed into liquidation.
  • If you can't see a way out- maybe costs are spiralling, or your business model just isn't effective- then it'd be a good idea to speak with a professional insolvency practitioner and explore your options- administration, liquidation or a CVA.

If the business continues to trade and you and your fellow directors know (or should've known) that there's no reasonable chance of the company avoiding insolvent liquidation then this is a civil offence known as "wrongful trading"- you may end up personally liable to cover any losses and pay creditors from the point at which you knew/ should've known that the company was insolvent up until the point where the business ceased to trade. You could also find yourself struck off from acting as a director of a limited company in the future.

How can insolvency affect your long-term business plans?

Becoming insolvent can not only affect your long-term business plans, but it can affect your personal plans too. 'Wrongful trading' is a civil offence, but if there is an intent to deceive or defraud creditors and customers, then this becomes a criminal offence known as fraudulent trading, the penalty for which carries a maximum sentence of up to 10 years imprisonment. The penalty for wrongful trading could lead to you and any other directors being personally liable for the company's debts and/or being banned as acting as the director of a limited company for up to 15 years.

How can I tell if my business is insolvent?

There are a number of signs that point toward insolvency, or the possibility that you're on the road to it:

  • Growing overdue amounts to HMRC- VAT, PAYE, Corporation Tax
  • Going overdrawn to pay bills
  • Having to regularly fund the business from personal accounts
  • Difficulty paying your creditors' bills on time
  • Increased reliance on business loans
  • Financial strain and a regularly reduced cash flow

Ignoring these problems won't make them go away and it won't diminish any potential liability- as the director you're expected to be fully aware of how your business is performing.

You should avoid giving any preferential treatment to some creditors at the expense of others. It can be as obvious as paying directors or connected companies prior to HMRC (this is the most frequent example that we see), or as subtle as paying certain suppliers before others as you wish to work with them in the future (or if you already work with them across other businesses). This can relate to any payments made up to two years prior to formally commencing insolvency proceedings.

How can we help you to avoid or deal with insolvent trading?

If you currently rely on your annual accounts to see where you're up to, then this can be a case of "too little, too late". Ideally you should be producing monthly (or at least quarterly) management accounts. Producing management accounts will help you to spot the warnings signs of potential insolvency earlier as well as helping to keep an eye on your business's overall financial health.

Management accounts also play a huge part in the overall efficiency of the business- they aid in financial planning, budgeting and forecasting as well as clearly displaying the profitable months in which you're able to take dividends (but if you've read this far down then it's unlikely that you should be taking dividends).

If you're seeing any of the above signs of financial strain in your company, then talk to us now about ways we might be able to help you deal with the situation. If necessary we can put you in touch with an insolvency practitioner who may be able to take such actions as:

The earlier you talk to us, the less drastic the solution may be.



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