When is a company insolvent? This is not just an academic question. It can be illegal to trade whilst insolvent and in the current difficult economic times, this is a crucial question for many of our local clients.
In a recent case re Cheyne Finance plc the court had to look at current and future debts, priority of creditors and when an ‘insolvency event’ occurred. A practical approach was taken looking at both current, and debts falling due, in the future. It can often be a complicated issue as to when a company should cease to trade, so it is wise to take legal advice as soon as a potential problem has arisen. In addition, directors can be liable for fraudulent and wrongful trading. Directors will be guilty of wrongful trading where they:
- “Knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation”; and
- They did not take “every step with a view to minimising the potential loss to the company’s creditors”.
Action is taken against them by the liquidator once the company has gone into insolvency liquidation. If you are having difficulties, please contact us for advice. We may be able to assist with legal documentation for new bank finance as well to help you to recover bad debts through court action (if necessary) to assist cash flow. We can also assist in arranging the best form of winding up or liquidation of the company for the business.