Insolvency is not always permanent. As such, for directors with duties, it’s important to know a thing or two about trading whilst insolvent and wrongful trading.
What is insolvent Trading?
Many companies may initially be loss making or temporarily insolvent if, for example, a customer invoice hasn’t been paid on time or there’s been a hold up in order fulfilment. Continuing to trade where the director has good reason to believe the company will recover is unlikely to result in an allegation of wrongful trading.
What is wrongful trading?
A director of an insolvent company that knowingly will never be able to pay its creditors, in a timely fashion, may be guilty of wrongful trading. If the level of creditors is allowed to increase, there can be harsh penalties for the directors.
With a fine line between the two, should wrongful trading be the case, directors need to be aware there is legislation relating to wrongful trading and they can be penalised and held accountable for debts incurred.
The best advice is to ‘seek advice’. Contact a licensed insolvency practitioner (like us) asap if in any doubt.
