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Insolvent trading?

Insolvent trading?

My client is sufferring in the current economic climate.

The good news is that they are continuing to get orders, their customers are paying on time and they are only a couple of months behind paying trade creditors. The P&L shows a small profit. However, they owe HMRC re PAYE, VAT & Corporation tax. They had a payment plan in place and were keeping up with the payments until last September. They have only made minimal payments since then.

They are in the process of trying to sell their house and will use some of the funds to repay the HMRC debt (they have a substantial amount of equity in the house).

Could they be prosecuted for wrongful trading as the company doesn't have the money to pay HMRC? Would the fact that the directors are trying to raise the money to pay the debt be sufficient to say that the company is a going concern? The bank is supporting them and has recently given them a loan, with personal guarantees from the directors.

Should they speak to an IP? They want to avoid incurring these costs if they can avoid it.


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09th Apr 2011 18:59

Wrongful trading

You ask "Could they be prosecuted for wrongful trading?"

Actually there are two issues here (1) wrongful trading contrary to s214 Insolvency Act 1986 and (2) fraudulent trading contrary to s993 Companies Act 2006 and s213 Insolvency Act 1986.

In terms of prosecution wrongful trading is NOT a criminal offence, but fraudulent trading is a criminal offence (carrying a maximum of 10 years imprisonment).

The difference is that fraudulent trading necessarily involves dishonesty, but wrongful trading need not.

So if your clients have the honest intention to pay all their creditors in full and a genuine belief that they can achieve this (and there is no other fraud involved in the operation of the business - such as supplying their bank with deliberately false information in connection with a loan or overdraft) then they cannot be prosecuted.

However even without dishonesty the individuals might be held personally liable to pay the company's debts if it goes down the tubes under the wrongful trading provisions.

It is likely an IP will be happy to give then initial advice for free (obviously in the hopes that they will return to him if things don't turn out too well).


P.S. If you suspect your clients of fraudulent trading you may be obliged to file a report with your firm's MLRO or SOCA under s330 PoCA 2002 / MLR 2007.

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By cawas
09th Apr 2011 22:24

Not fraudulent


I do not believe there is an issue with fraudulent trading - they have every intention to pay all creditors as soon as they have the funds.

Can the directors be made personally bankrupt if the company is insolvent - or will they be protected because of the limited status? Also would they be disqualified as directors?


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10th Apr 2011 07:41


The answer to all your questions is "Yes, possibly".

If there is found to be "wrongful trading" then the directors can be made personally responsible for the company's debts and could become personally bankrupt.

They could, on the other hand, be protected by the company's limited liability status.

They could possibly be disqualified from being company directors, or being involved in the management of the company, for a period of years.

An undischarged bankrupt is 'disqualified' in any event whilst he remains undischarged.

The issue in relation to "wrongful trading" is, did the director allow the company to continue to trade and incur debts after he "knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation"?

The most usual outcome when a company goes down is that there is no finding of "wrongful trading" and the personal liabilities of the directors are limited to those things for which they had given personal guarantees (which are sometimes given in relation to bank borrowings, for example - as they have been in your clients' case).  But it all depends on the facts of the case.

Talk to an IP.


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11th Apr 2011 12:11

I am an IP and would be happy to advise.

From the brief description you have given it does not seem that your client is in danger of any action against them, although they do need to take action sooner rather than later.  I expect that a sensible solution can be reached.  I suggest that your client gives me a call to discuss options; my number is 02380 234222. 

-- Stephen Powell FCCA MABRP Insolvency Practitioner HJS Recovery

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