A director falls foul of the wrongful trading provisions when it continues to carry on trading whilst insolvent to the detriment of its creditors. The provisions were suspended due to COVID-19 to allow directors to continue to trade their companies without fear of prosecution.
The suspension was put in place from 1 March 2020 and ends on 30 September 2020.
It is essential as a director of a company you are aware of the risks of trading whilst insolvent and how this can lead to you being personally liable.
How do I know when my company has become insolvent?
It is not always clear when a company reaches the ‘insolvency point’ as it does not necessarily need to involve the occurrence of a formal insolvency process. It is every director’s responsibility to ensure they are aware of any warning signs and act accordingly.
A company can become insolvent in the following ways:
- Cash-flow insolvent – If the company is unable to pay its debts as and when they fall due. Directors should ask themselves – if the music stopped, could the company pay all of the debts due? If the answer is no, they are cashflow insolvent and if they continue to trade, they are at risk of being liable under the wrongful trading.
- Balance sheet insolvent – if the company’s liabilities exceed its assets. This should be apparent on a review of the company’s accounts. It is essential all directors keep themselves fully informed in relation to the financial position of the company. It is not a defence to state that you delegated your duties relating to the company’s financial affairs.
- If a creditor takes steps to enforce their rights against the company, which is returned unsatisfied.
- If a statutory demand is served on the company and the debt is not satisfied or secured to the creditor’s satisfaction, or legitimately disputed within 21 days.
If the company reaches the point of insolvency, the director’s duty shifts from promoting the success of the company for the benefit of shareholders to the company’s creditors as a whole. Any actions taken should be in the best interests of the company’s creditors.
How can I, as a director, be held personally liable?
If the company enters into a formal insolvency procedure such as administration or liquidation, an insolvency practitioner will be appointed to manage the company’s affairs and will usually investigate the circumstances in which the company became insolvent. This investigation includes looking at the director’s conduct and decision making in relation to his/her management of the company and any transactions entered into prior to the administration/liquidation.
A director can be found personally liable for wrongful trading when:
- the company continues to trade whilst there was no reasonable prospect of the company avoiding an insolvent liquidation or administration; and
- the director failed to take every step after this point with a view of minimising further potential loss to the company’s creditors.
A director can be made to contribute to the company’s assets by an order of the Court which can involve paying the increase in creditor claims which arose due to continuing to trade whilst insolvent.
How else could I, as a director, be found personally liable?
A director can be found personally liable for fraudulent trading whereby the company carried on with the intent to: defraud its creditors, defraud creditors of any other person and/or for any other fraudulent purpose. If a Court finds that a person (which goes beyond just directors) knowingly participated in the fraudulent activity, those persons can be held liable to compensate to the company.
A director can also be held personally liable if found to be guilty of misfeasance as a result of breaching their duties as a director. Please see our article which details a director’s duties and how to be proactive when their company is on the verge of insolvency at: http://www.amansehgal.co.uk/coronavirus-being-proactive-as-a-director-of-a-company-facing-the-threat-of-insolvency/
What should I do now?
- All directors should take a cautious approach as soon as they are aware their company is in financial difficulty.
- Do raise any concerns you may have about the company’s finances at the earliest opportunity with fellow directors and/or your accountants.
- It is advised that you seek advice from a legal professional or licenced insolvency practitioner as soon as possible should you consider your company is balance sheet insolvent or unable to pay its creditors as and when due.
- Seeking and following professional advice at an early stage can limit your personal liability as you are able to provide evidence you were acting in the best interests of the company in seeking such advice.
- Do not resign immediately once you have become aware that insolvency cannot be avoided as this is not looked upon favourably. You may still be liable to contribute to the company’s assets even if you have resigned
- It is essential that the directors document their decision making throughout and hold regular minuted board meetings
If you are concerned about the financial position of your company or would like to discuss this further, please contact Aman Sehgal, Partner at Keystone Law on 0191 687 2050.