If your company struggles to pay its bills, it could face insolvency. Continuing to trade in this situation can carry serious risks for company Directors. These risks range from personal liability for company debts to legal action and disqualification from acting as a Director in the future.
While the topic of insolvency can feel overwhelming, understanding your responsibilities and acting promptly can help protect you and your creditors. This guide explains what it means to trade while insolvent, the potential consequences, and how Directors can act responsibly to mitigate the risks.
What is insolvent trading?
A company is considered insolvent when it can no longer pay its debts as they fall due (known as cash flow insolvency) or when its total liabilities exceed its assets (balance sheet insolvency).
Trading while insolvent refers to continuing business operations despite being in this financial state. This can involve taking on new work, entering contracts, incurring further debt, or making selective payments to creditors. While not always illegal, trading in insolvency without due care and professional advice can quickly cross into misconduct.
Once a company becomes insolvent, the Director’s legal duties change. Instead of acting in the best interests of shareholders, the Director must act in the best interests of the company’s creditors. Failing to do so can lead to serious legal and financial consequences.
Director responsibilities when a company becomes insolvent
When a company becomes insolvent, Directors must act in the best interests of creditors. Failing to do so can result in personal liability and legal consequences.
Take action quickly
Directors should not delay once insolvency is suspected. Continuing to trade without a realistic plan can worsen the situation. Seeking advice from a licensed Insolvency Practitioner is essential, and in many cases, stopping trading immediately is the safest option.
Avoid harmful transactions
Certain actions — like repaying one creditor over others (preference payments), selling assets below market value, or taking on debts the company can’t afford — can be challenged later by a liquidator. These transactions reduce what’s available to all creditors and may be reversed.
Protect your position
All Director decisions made during insolvency will be reviewed. If misconduct is found, Directors may be held personally liable. Acting promptly, keeping records, and getting professional advice are key to protecting both creditors and yourself.
What is wrongful trading?
Wrongful trading is a civil offence under Section 214 of the Insolvency Act 1986. It occurs when Directors continue trading when they knew — or ought to have known — that there was no reasonable prospect of avoiding insolvency.
In such cases, if the company eventually goes into liquidation, the liquidator may bring a claim against the Directors. If the court agrees, Directors can be held personally liable for some or all of the losses suffered by creditors from the point insolvency should have been recognised.
It’s important to note that wrongful trading doesn’t require dishonest intent. A failure to act appropriately, even through inaction or delay, can be enough to trigger liability.
Wrongful trading vs fraudulent trading
While wrongful trading is a civil offence, fraudulent trading is a criminal offence — and a much more serious one.
Fraudulent trading involves deliberately misleading creditors or continuing to trade with the intention to defraud. Examples might include taking deposits for services you know you can’t provide or falsifying financial statements to hide the true position of the company.
If proven, fraudulent trading can lead to criminal prosecution, significant fines, and, in some cases, imprisonment. For this reason, it’s vital that Directors seek professional advice and ensure their actions are transparent, documented, and in the best interests of all creditors.
Related: Is It Illegal To Run An Insolvent Company?
The consequences of trading in insolvency
Trading while insolvent can have serious repercussions for company Directors. These risks can affect not just your current company but your personal finances and future career.
Personal liability for company debts
If you continue trading when your company is insolvent, and creditors suffer increased losses as a result, you could be held personally liable. This means you may be required to contribute towards the company’s debts — sometimes tens of thousands of pounds or more — depending on the extent of the loss and your actions.
Disqualification from Directorship
If the Insolvency Service finds evidence of misconduct, you could face disqualification from acting as a company Director for up to 15 years. This can significantly impact your ability to run a business or hold certain leadership, financial, or governance roles in the future.
Damage to your reputation
When a company enters liquidation, the conduct of its Directors is reviewed, and a report is filed. Any legal action taken becomes part of the public record. This can affect your professional reputation and may make it more difficult to start another company, attract investment, or access business finance.
Taking the right steps early can help you avoid these risks and demonstrate that you’ve acted responsibly as a Director.
Recognising the warning signs of insolvency
Many Directors don’t realise their company is insolvent until it’s too late. That’s why it’s crucial to know the early warning signs and act quickly when they appear. Here are some of the key signs to look out for:
Missed payments to suppliers, staff, or HMRC
The inability to meet routine payment obligations suggests the company may be facing serious cash flow issues.
Relying on short-term borrowing to cover basic costs
Needing loans or credit to pay for everyday operations signals that the business isn’t generating enough income to survive.
Receiving County Court Judgments (CCJs)
A CCJ shows that a creditor has taken legal action for unpaid debts, which damages the company’s credit rating and indicates deeper financial trouble.
Pressure or legal threats from creditors
Persistent contact or formal action from creditors may be a sign that insolvency is already setting in.
Rising debt with no repayment plan
If debts are increasing and the company has no viable route to repay them, the situation is likely unsustainable.
Liabilities exceeding assets
If your balance sheet shows more liabilities than assets, the company may be balance sheet insolvent.
Late payment of tax, VAT, or National Insurance
HMRC arrears are a key warning sign and can escalate quickly if not addressed.
Delays in paying rent or utilities
Falling behind on essential overheads such as rent or energy bills often signals wider financial instability.
If you’re unsure of your company’s status, a cash flow forecast or insolvency test can help clarify whether you’re trading while insolvent. Seeking advice early is the best way to protect yourself, your business, and your creditors.
Related: How to Spot the Warning Signs of an Insolvent Company
How to protect yourself as a Director
If your company is struggling financially, taking early, responsible action is the best way to protect yourself from the risks of trading whilst insolvent. As a Director, your conduct will be reviewed if the company enters liquidation — so it’s important to show that you’ve acted in the best interests of creditors.
Seek advice from a licensed Insolvency Practitioner
As soon as you suspect insolvency, speak to a licensed Insolvency Practitioner. They will assess your company’s position and help you understand your duties and options. Acting on professional advice not only improves outcomes — it also demonstrates that you’ve taken your responsibilities seriously.
Keep accurate records and minute your decisions
Maintain up-to-date financial records, including cash flow forecasts, balance sheets and creditor schedules. Hold regular board meetings and keep minutes of any key decisions — particularly those relating to continued trading or efforts to improve the company’s financial position. This documentation provides evidence that you’ve acted diligently and in line with your legal duties.
Avoid risky or preferential transactions
Don’t make payments that favour one creditor over another, and avoid selling assets at below market value. These actions can be reversed by a liquidator and may result in personal liability. Always consider whether the company can afford any new agreements before signing them. If there’s any doubt, pause and get advice.
Know when to stop trading
Continuing to trade when the company has no realistic prospect of recovery can lead to wrongful trading claims. If the company can’t meet its obligations, it may be safer to stop trading until formal advice has been sought. Halting activity early can help preserve assets and prevent further losses for creditors.
What are your options if your company is insolvent?
If it becomes clear that your company cannot recover, there are formal insolvency procedures designed to help you close the business in a legal, controlled way — while minimising risk and dealing with outstanding debts.
Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation (CVL) is the most common route for insolvent companies that can’t continue trading. It allows Directors to take control of the situation, appoint a licensed Insolvency Practitioner of their choosing, and close the business in a professional and compliant manner.
Once the process begins, legal action from creditors is halted. The company’s assets are liquidated, and any remaining unsecured debts are written off. It also significantly reduces the risk of wrongful trading claims, as you’ll be acting in the creditors’ best interests.
Company Voluntary Arrangement (CVA)
If the company is viable but struggling with cash flow or historic debt, a Company Voluntary Arrangement may offer a lifeline. This formal agreement allows the business to repay creditors over time — typically three to five years — while continuing to trade. It can provide breathing space, preserve jobs, and avoid liquidation altogether.
CVAs are especially useful for companies with a strong underlying business model but temporary financial difficulties.
Administration
In more complex situations, administration can offer short-term legal protection from creditor action while an Insolvency Practitioner works to restructure or sell the business. It can result in a better return for creditors than immediate liquidation and may lead to a company sale or CVA.
HMRC Time to Pay Arrangement
If your financial pressures are largely due to tax arrears, a Time to Pay Arrangement with HMRC may allow you to spread repayments over a set period. While not a formal insolvency procedure, it can ease pressure and avoid more serious enforcement action — provided your business is otherwise viable.
How Clarke Bell can help
If you’re concerned that your company is trading whilst insolvent, Clarke Bell is here to support you. Our experienced team of licensed Insolvency Practitioners has been helping Directors navigate insolvency for over 30 years.
We’ll assess your company’s position, explain your legal responsibilities, and guide you through your next steps. We aim to make the process as straightforward and stress-free as possible, helping you protect your position and move forward with confidence.
Contact us today for a free consultation to find out how we can help.
