Trading Whilst Insolvent: Avoiding The Pitfalls

Trading Whilst Insolvent: Avoiding The Pitfalls

Is your company insolvent?

Whether a company is insolvent or not is not simply a case of whether it is in a formal insolvency procedure or not.

Many companies can be technically insolvent and can continue trading for some time.


There are two tests to apply to determine if your company is technically insolvent:

1. The ‘Balance Sheet Test’:- are the company’s liabilities greater than its assets? Does the balance sheet show a positive or negative figure at the bottom?

2. The ‘Cashflow Test’:- is the company able to pay any liabilities it has as and when they fall due?


If the company fails either test then it is technically insolvent.

Directors of companies who are operating whilst insolvent should take great care in their dealings and it is recommended that they consult an insolvency practitioner at an early stage.


My Company has failed the insolvency tests. Who should I speak to about this?

Directors of companies that are technically insolvent should assess the long-term viability of the company. They are expected to take advice at the point they identify this. This advice may be from their current advisors, such as their accountants and/or solicitors, but they should also consider taking the advice of a qualified and licensed Insolvency Practitioner (“IP”).

At BABR our team of experienced IP’s offer advice tailored to each company’s situation. We do not charge for initial consultations and can assess the situation and discuss the directors’ future plans.

We would aim to work alongside a company’s advisors to sense-check the business model and give them reassurance that their plans are sensible and viable. This advice can protect directors personally if, despite best endeavours, things do not work out as planned.

We can also arrange check-ups or follow up meetings to see how things are progressing and can give advice on warning signs or any red lines which should trigger a reset on the strategy.


What are the implications of continuing to trade whilst insolvent?

Directors are expected to shift their focus from trading for the benefit of the company’s shareholders to ensuring they act in the interests of the company’s creditors.

This applies to all creditors (sometimes referred to as the general body of creditors) so doing things in the interests of, for example, its trade creditors, but to the detriment of, for example, HMRC are not sufficient justification. Creditors must be considered on the whole.


Is trading whilst insolvent an offence?

Trading whilst insolvent is in itself an offence under the Insolvency Act and if the company later enters a formal insolvency procedure, the liquidator or administrator will be required to review when the directors ought to have been aware the company was insolvent, and whether continued trading made the situation worse for creditors.

This can be mitigated if the directors had good reason to continue and had a clear and well thought out plan in place that would resolve or improve the position, but reinforces the need to take care, think carefully and take advice.

If the directors clearly made the situation worse by continuing and aren’t able to offer a suitable explanation of why they decided to continue, then it is possible that they become personally liable for the additional debts that accrued in that period.


Can I pay connected parties or transfer assets to them in settlement of debt?

When a company is technically in an insolvent position, directors should be very careful in undertaking any transactions other than in the ordinary course of business.

The transfer of assets or payments made to connected parties could be overturned if the company later enters a formal insolvency procedure and/or directors may be held personally liable for allowing the transaction to take place.

Directors are strongly recommended to seek the advice of an IP if they are considering such transactions.

Similarly, if it is proposed that any assets are sold to a connected party then an IP’s guidance is strongly recommended to make sure the transaction is conducted at arms-length and fair value is paid for them.


Can an IP force me to cease trading?

If directors voluntarily consult with an IP, then any decision to cease trading or continue trading is ultimately a decision for the company’s board of directors to take.

Our experienced IPs can ensure that directors receive the best advice and have clear recommendations on any proposed strategy.

Whilst that advice should not be taken lightly and should be carefully considered, an IP will not declare the business insolvent (in terms of forcing it into a formal procedure) at a consultation.


When does my company come out of insolvency?

If directors of an insolvent company decide to continue trading, then the ultimate goal should always be to return the company to a solvent position.

A company is solvent if it reaches a position once more whereby it passes both of the insolvency tests.

Although there is no formal acknowledgment or certification of this, at this point the directors have much more freedom in how they use or dispose of company assets and how they treat connected parties.

They can also once again focus on generating profits for its shareholders rather than to meet its historic liabilities.


How do I contact BABR?

Businesses operating whilst insolvent is not unusual, but great care should be taken.

Our experienced team at BABR can help to provide guidance to directors along the way to make sure they avoid potential pitfalls and mitigate any risk of them later being held personally liable for liabilities or losses incurred by the company.

We’re ready to talk when you are, simply click the button below to book your FREE financial consultation:


Preventing insolvency should be a priority for every company director. By implementing these five essential strategies—effective financial management, diversification of revenue streams, efficient cost management, strengthening customer relationships, and seeking professional advice— as detailed in our blog here, you can significantly reduce the risk of insolvency and ensure the long-term sustainability of your business.

BABR can even help support your business with tailored financial support!