Directors of a company in distress, often ask about trading whilst insolvent and the implications of doing so. Simply put, should the Director/s continue to trade whilst insolvent, the Director/s can become personally liable for any new debt incurred.
There are options around this; however, the most important thing is to take steps to address the issue, should you think you are involved in ‘reckless trading’.
The main concept behind ‘reckless trading’ and its prevention is that, should a company Director know that their company is insolvent and continue to trade, creditors who provided credit to the company would have been misinformed and suffered a loss.
All Directors need to be aware of the statutory duty they owe to their company not to trade whilst insolvent.
The relevant provision is section 135 of the Companies Act 1993:
A Director of a Company must:
There are some other points to consider also:
The solvency test has two parts – liquidity and balance sheet.
Directors must ensure that the solvency test will be met by the company immediately following the transaction.
For practical purposes, Directors should state clearly on all Resolutions, the grounds upon which the Directors rely to determine the solvency test will be met. Directors should also state clearly any reports, financial statements, valuations or estimates upon which they rely in meeting the solvency test.
Contact Liquidation Management to find out more about Reckless Trading and how we might help you retrieve your situation best.