The law requires all insolvent companies to be liquidated. There are two difficulties one is identifying if a company is insolvent to the extent required and, secondly, when did it become insolvent. Each of these is important for separate but connected reasons. Being insolvent means, being unable to pay company debts as they fall due. If a director allows a company to trade beyond this point then they may well fall foul of the Companies Act. That is the danger.
In practice a company can very often get into short term difficulties. In those circumstances the directors on behalf of the company may make arrangements with key suppliers and stakeholders until matters are resolved. On such occasions the debts were essentially rescheduled by agreement and the due dates changed in line with the circumstances, so no principle was breached.
However, the reality is often more untidy. Such arrangements may be effectively forced on unwilling suppliers, deadlines given are missed and the duration extended unilaterally. This now enters the less than clear world of possibly trading while insolvent. In practice there are some warning signs detailed in
A director’s conduct will always be considered by a liquidator. A liquidator will want to identify if the company ever traded while insolvent, especially in the period up to the date of liquidation. If it has traded in this way, the date the insolvent trading began must be established in order to set a timeline for review. If a director allows a company to trade while insolvent, it can have a direct impact on the director personally, who may be restricted or disqualified on review. It may in some cases, it may expose the director to a personal liability for particular debts.
As always in these cases, professional advice should be sought at the earliest possible date.