There are many rules and stipulations for business trading, but on the whole, these laws are messy, complicated, and a regulatory nightmare for those involved. Some are pretty straightforward, letting business owners and investors slide with basic common-sense approaches, but there are areas of ambiguity that may land you in hot water if you aren’t fully aware of the consequences of your actions.

One of these areas is insolvent trading, and you may have grave misconceptions about the potential effects of this crime.

The Basics of Insolvent Trading

When a company is considered insolvent, it’s found to be unable to make good on its debts and loans. During this period, it’s illegal to incur new debts; any action to incur a new debt is known as insolvent trading, and is a criminal act in several countries, including the UK and Australia. In other countries, there may be different terminology and legal definitions to constrain and articulate the act, but the basic concept is more or less the same. For example, in the United States, this takes the form of the Chapter 11 bankruptcy code.

What You Didn’t Know

Here are some facts about insolvent trading that you probably didn’t know:

1. A director may be held personally liable for the act of trading. If a company is found to have participated in insolvent trading, the director of that company may be held personally liable for the action if he/she initiated the act, or if he/she knowingly allowed the act to take place. By extension, the parent companies of holding companies can be held liable for the actions of the holding company while insolvent, provided it knew of the action and allowed it to happen.
2. Directors don’t have to be appointed. The term “director” is rather ambiguous, but it refers to anybody acting in a directorial capacity—that means anybody in charge of making a decision, whether or not they were initially appointed to the role, could be held liable for an act of insolvent trading. Hypothetically, then, a “shadow” director, fulfilling the role in the actual director’s stead, could be held liable for the act.
3. Fines reach up to $200,000—and that’s not all. If you’re found personally responsible for engaging in insolvent trading, you could face a monetary penalty of up to $200,000—and that’s on top of any damages you have to pay your vendors. What’s more, you could undergo criminal proceedings and end up in prison for your actions. Prison sentences and six-digit fines are usually reserved for the worst of cases, but they are a legitimate threat.
4. Liquidators are responsible for taking action. When it comes to identifying a trading action as having taken place, liquidators are the ones responsible. A liquidator may happen upon a case of insolvent trading, or suspect a case and pursue further evidence. When a liquidator brings charges, it does so on behalf of all creditors. However, if a liquidator doesn’t bring charges (for whatever reason), a creditor may then pursue charges exclusively for any debts. A liquidator has up to six years from the initial date of liquidation to bring insolvent trading charges against a company.
5. Both civil and criminal insolvent trading charges exist. There’s a subtle but important distinction between criminal and civil insolvent trading charges, as both exist for insolvent traders. In a civil case, a liquidator or creditor is basically trying to recover their financial losses. In a criminal case, a director may face fines or prison time for his/her actions.

Key Takeaways for Business Owners

If your business is insolvent, or on the verge of insolvency, there are two key takeaways you should gain from this article:

• If your company is insolvent, your director or shadow director can be held personally liable for any insolvent trading you’ve done.
• Liquidators and creditors have six years to bring charges, which may be civil or criminal in nature.

Remember, insolvent trading exists in most companies, and it’s an entirely preventable offense. Recognize when your company is insolvent, and make your decisions accordingly to avoid being held personally liable for a crime you’ve committed.

Categories: General