What is Company Insolvency & How Company Insolvency Process Works?

What is company insolvency Or rather what is company liquidation to the point? Company insolvency is a company that might be insolvent and if your company is insolvent and you continue to trade. Are you aware of the consequences whilst trading insolvent the legal implications of director disqualifications and what could happen to you as a company director?

What is Insolvent Trading?

Insolvent Trading occurs when a company does not stop obtaining credit although the directors know that the company has not got the sufficient funds to repay the creditors. It is unlawful in many countries, including the UK, under the 1986 UK Insolvency Act. Insolvent Trading can lead to the directors of a company becoming personally responsible for repaying the creditors. Insolvent Trading is sometimes referred to as “Wrongful Trading”. If you are not sure if you as a director of a company are liable you should speak with an insolvency auditor for advice, just to be safe.

Why would a company get themselves into this position?

Several factors can lead to a company involving themselves with these illegal practices, such as increasing debt, failure to meet the creditors’ usual trading terms, a lack of cash flow and poorly organised financial records. This is a highly unfavourable position for any company to be in, and the consequences can be severe for the company directors. Previous directors and Shadow directors are also liable for prosecution under the Section 214 of the 1986 Insolvency Act. Are you in this position with your current company? If so get professional advice from your local insolvency auditor.

What are the legal implications of Wrongful Trading?

Additional to the fines and criminal charges that company directors may face, if the liquidator has witnessed or experienced poor conduct from the director, they may also be banned from future directorships of other companies for a fixed period of time. This is due to the 1986 Company Directors Disqualification Act, and many dealings of an insolvent company in the UK will be undertaken by the Department for Business, Innovation and Skill’s (BIS) Disqualification Unit.

What should you do if you’re in this position?

The best thing that you can do is seek professional advice from an Insolvency Auditor, and do this as early as possible to address the issues that you and your business are facing. Even if you are not yet in this position, but fear you may be in the near future, you should still seek professional advice to potentially prevent your company from becoming insolvent.

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