Sharon McDougall - 11th February 2025 - 3 minutes to read
The directors of insolvent companies (companies that cannot pay their debts) have a legal duty to act in the best interests of their creditors. In most cases, that means ceasing trading as soon as your company is insolvent to prevent you from building up further debts and worsening your creditors’ positions.
If you continue to trade while insolvent, you must seek professional advice and have a clear and realistic plan to return the company to profitability quickly. If you don’t, it can have serious implications for your company and you personally.
Trading while insolvent is continuing to run the business as normal even though it is insolvent. The company is technically insolvent if it cannot pay its debts when they’re due or if the value of its liabilities is greater than its assets.
Continuing to trade while the company is insolvent is not an offence in itself. If you intend to keep trading, you must call a meeting of the directors and fully explain why you have made the decision in writing. You should also seek professional advice to guide your decision and ensure you prioritise your creditors’ interests.
The risk is that if you continue trading while insolvent and the company subsequently enters a formal insolvency process, such as Liquidation or Administration, your decision to trade and actions as directors will be scrutinised very closely. If the liquidator or administrator finds that your decision was flawed or you did not act in accordance with insolvency law, you could face further action.
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If you continue to trade when the company is insolvent despite knowing it has no realistic prospect of a recovery, you are committing a civil offence called wrongful trading. The penalties for wrongful trading include fines, personal liability for company debts and disqualification from operating as a company director for up to 15 years.
If you continue to trade an insolvent company and engage in deliberate activities designed to defraud your creditors, you are stepping into the territory of fraudulent trading. Fraudulent trading is a criminal offence and can lead to a custodial sentence. Examples of fraudulent trading include taking customer orders you cannot fulfil, hiding company assets or accepting additional credit with no intention of making the repayments.
If you seek advice from an insolvency practitioner and they believe the company can make a full recovery by continuing to trade, you must put a clear plan in place. You should also hold regular minutes board meetings to discuss your position and the reasons why you’re making the decisions you are. That can help to protect you from accusations of wrongful trading if the business fails.
There are also a few things you should be careful to avoid, including:
You could face penalties if you engage in any of these types of trading during or leading up to your company’s insolvency.
If your business fails and you enter liquidation or administration, the insolvency practitioner managing the process must investigate your conduct. They will want to understand your role in the company’s failure, the reasons you chose to continue to trade and whether your actions worsened the position of creditors.
If they find any evidence of misconduct, wrongful or fraudulent trading, you could face the following penalties:
Financial penalties
Fines, penalties and compensation orders are all potential consequences if you have not carried out your duties as a company director.
Personal liability for company debts
You can be made personally liable to repay some or all of your company’s debts if you continue to trade while insolvent and worsen the position of your creditors. In extreme cases, your personal assets could be seized and you may even face sequestration if you cannot pay.
Director disqualification
You could be banned from acting as a director or officer of a company for up to 15 years. The length of the ban will depend on the severity of the misconduct. That can limit your opportunities to take senior roles in limited companies.
Criminal charges
If you continue trading while insolvent with the deliberate intention to defraud your creditors, you could be handed a substantial fine and even a prison sentence.
Given the risks of trading while insolvent, it’s something you should approach very carefully. If your company is insolvent or heading that way, contact a business debt expert immediately. They will discuss your financial issues with you and help you determine the most appropriate route forward. Contact our experts for a free, same-day consultation or arrange a meeting at one of our offices throughout Scotland.
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Business Debts in ScotlandAdministration is an insolvency process that provides breathing space for companies struggling with debt, giving them the time needed to establish a plan going forwards. With several options potentially available at the end of administration, it’s an effective step for many businesses.
Find out MoreA Company Voluntary Arrangement (CVA) can help a company to escape debt by negotiating a formal payment plan with creditors allowing for reduced monthly repayments. Directors retain full control of their company during a CVA and the business is allowed to continue trading throughout.
Find out MoreCompulsory Liquidation is a formal insolvency procedure used to close down limited companies that cannot pay their debts.
Find out MoreWhen a limited company becomes insolvent, it’s important for directors to place the interests of creditors first and do all they can to minimise further losses. Creditors’ Voluntary Liquidation (CVL) is an insolvency process that allows this to happen, and ensures directors comply with strict insolvency laws.
Find out MoreA Debt Arrangement Scheme (DAS) lets you pay off your debt through a series of manageable instalments over a reasonable length of time.
Find out MoreMembers’ Voluntary Liquidation (MVL) allows you to close your business and extract the profits in a tax-efficient way. It’s a process that’s available to solvent limited companies, and requires you to make an official Declaration of Solvency prior to commencement.
Find out MoreSequestration is the Scottish version of bankruptcy and may be suitable for you if you do not have the money to pay back your debts
Find out MoreA Trust Deed involves making a monthly contribution to your debts for up to four years. After this time any remaining debt included in the Trust Deed will not need to be paid.
Find out MoreSharon McDougall
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Sequestration is the Scottish version of bankruptcy and may be suitable for you if you do not have the money to pay back your debts
Find out MoreA Trust Deed involves making a monthly contribution to your debts for up to four years. After this time any remaining debt included in the Trust Deed will not need to be paid.
Find out MoreA Debt Arrangement Scheme (DAS) lets you pay off your debt through a series of manageable instalments over a reasonable length of time.
Find out MoreWhether you are a sole trader or a limited company director, we can help you work through your current financial problems including money owed to HMRC
Business Debts in ScotlandOur Insolvency Practitioners are regulated by ICAS or the IPA and our firm is authorised and regulated by the Financial Conduct Authority
We have FCA authorisation for advice relating to Debt Arrangement Schemes and we are regulated by the ICAS and IPA when giving advice as an insolvency practitioner leading to our appointment in formal insolvency proceedings
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