Most people have a long final week of the month when payday is only a couple of days away yet feels like it’s months instead. 

Sometimes we can cut corners and hold off paying some bills by a day or so until those wages land or we can take a deep breath and go overdrawn for 24 or 48 hours or so until the cavalry arrives at midnight on that final day. 

But businesses are not people. So what happens when they come to a financial cliff edge? 

Some directors might be close to this and not even know it, or think they can just avoid it if they are clever enough. Others decide to close their eyes and put a foot (or more) over the edge hoping that everything will turn out alright and when they open their eyes they’ll still be on solid ground.  

These scenarios could all be trading while insolvent. 

While a small number will plough on ahead, regardless of the legality or morality of their actions – this is called wrongful trading. 

We’ll look at the differences between them and what a business owner or director can do if they suspect or know their business is involved in them. 

Trading while Insolvent

Trading while insolvent is a specific legal term used to describe when a company either fails to pay its bills and debts as they become due or, when the liabilities on their balance sheet exceed its total assets but they continue to trade. 

By doing this, the business is continuing to trade where the above applies, meaning the company is trading while insolvent. 

While not specifically an offence, once directors are aware that this is the situation then they have to act to minimise any losses for creditors. The first step will be to take some advice on whether an insolvency procedure such as administration or a company voluntary arrangement (CVA) might be the best course of action for them to follow. 

While this is ongoing there are also some key actions they should not do including:

  • Receive goods they know, or should know, that they won’t be able to pay for
  • Dispose of any assets outside of their normal course of business without professional advice
  • Make any preferential payments – which could be payments to friends, family, business associates or creditors

If they fail to abide by these guidelines and continue to trade knowing that the company has no way to repay debts or have a viable future then they could be guilty of wrongful trading. 

Wrongful trading? 

The main difference between wrongful trading and trading while insolvent to a degree is intent. Some businesses can trade while insolvent unknowingly and others could continue to trade if they have a concrete and viable plan to return to profitability in the near term. 

Wrongful trading is when directors:

  • Continue to trade despite knowing they will be unable to pay their debts 
  • Take on new or additional debt knowing there will be no reasonable way to repay it
  • Sell or dispose of assets at a loss to raise funds that will not be enough to repay existing debts

Wrongful trading is said to take effect from the point that directors “ought” to have known the company was insolvent, with no prospect of recovery. 

So if the company is insolvent and the board continues to trade, the directors could then become personally liable for any debts incurred from this point.

Fraudulent trading

There is a difference between trading while insolvent, wrongful trading and fraudulent trading. 

The prior two can be done without directors’ knowledge or intent to deceive but fraudulent trading specifically refers to an attempt to defraud creditors and suppliers from the offset. 

It’s a specific criminal offence whereas wrongful trading, if proven, is a civil offence. 

Fraudulent trading is far more serious than wrongful trading, and the penalties for conviction can be much more severe including:

  • A prison sentence of up to 10 years
  • A fine of up to £5,000
  • Disqualification from managing a company for up to 15 years

Being found guilty of wrongful trading only incurs possible disqualification. 

We know how hard it can be to run your own business, especially with the conditions faced during the past couple of years. 

If your company is your life’s work and dream, it can be almost impossible to leave it, no matter what circumstances it finds itself in but if it’s approaching insolvency or actual wrongful trading – then there could still be time to get some advice and make the best of a bad situation. 

We offer a free initial consultation to any director or business owner at a convenient time for them

One of our experts will work with them to better understand their legal obligations and what steps they need to take to protect themselves and their business both in the immediate future and in the longer term too. 

There may be options for them that they hadn’t considered or knew they could pursue but only if they get in touch with us first to discuss these hard questions.