Trading while insolvent

Trading while insolvent is unlawful in a number of legal systems, and may result in the directors becoming personally liable for a company's assets.

Under UK insolvency law trading once a company is legally insolvent can trigger several provisions of the Insolvency Act 1986, including,

• Wrongful trading - Section 214
• Transaction at an undervalue - Section 238
• Preferences - Section 239
• Extortionate credit transactions - Section 244

Under wrongful trading legislation in the UK, if the company continues to trade while it is insolvent the directors of the company may become personally liable to contribute to the company's assets and help meet the deficit to unsecured creditors if the company's financial position is made worse by the directors continuing to trade instead of putting the company immediately into liquidation.

Company Voluntary Arrangement

An insolvent company is bound by the regulations of the Company Voluntary Arrangement. The CVA is a form of composition, similar to the personal IVA (Individual Voluntary Arrangement), where an insolvency procedure allows a company with debt problems or insolvent to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time. A Company Voluntary Arrangement (CVA) can be applied for by; the agreement of all directors of the company, the legal administrators of the company, or the appointed company liquidator.

A company voluntary arrangement can only be implemented by an insolvency practitioner who will draft Proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75% (by debt value) of the creditors who vote agree then the CVA is accepted. All the company creditors are then bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal actions as long as the terms are adhered to, and existing legal action such as a Winding Up Order ceases.

During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees charged by the insolvency practitioner will be deducted from these payments. The company is not required to fund any further costs.

Legal issues

In most legal systems, the liability in respect of other transactions only extends for a certain period of time prior to the company going into liquidation. In the UK, directors are exposed in respect of transaction at an undervalue, preferences, and extortionate credit transactions if the transaction occurred: a) while the company was insolvent; and b) within 2 years before the onset of liquidation if the transaction was with a connected person, and 6 months if the transaction was with an unconnected person.

Directors who continue to trade while insolvent may face disqualification under the Company Directors Disqualification Act 1986. Under the provision of this act, when a company goes into liquidation, the liquidator must make a report to the Disqualification Unit of the The Department for Business, Innovation and Skills (BIS) on the conduct of all directors. If the liquidator has come across conduct which makes the director unfit to be involved in the management of a company in the future (which things would include trading while insolvent) the Department for Business, Innovation and Skills will apply to the Court for an order disqualifying the director or directors from acting as a company director for a certain period.

Many other countries have similar laws, often referred to as 'insolvent trading' or wrongful trading.

See also

• UK company law
• US insolvency law

Notes

External links

• Insolvency Service website