Trading whilst insolvent
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Under UK law, specifically the Insolvency Act 1986, a limited liability company is held to be trading whilst insolvent when it is either unable to pay its debts as they fall due, or when the value of its assets is less than its liabilities.
Company directors owe a duty of care to the company, its shareholders, its employees and, if there is doubt as to its insolvency, its creditors. A limited company is a separate legal entity from its directors and shareholders; however, trading whilst insolvent can leave a director personally liable for:
- their own unpaid PAYE and National Insurance deductions;
- unpaid income tax where they have taken cash drawings from the company;
- personal guarantees given on behalf of the company;
- liability arising from trading after they ought to have realised that the business was ultimately bound to fail — this is known as "wrongful trading";
- liability where they have benefited from a transaction at an undervalue or preference;
- liability resulting from fraudulent trading.
If the liquidator believes the directors did minimise their losses or were trading whilst insolvent, he may apply for an order that they be required to contribute to the company's assets personally — that is, make personally liable for the company's debts. This liability will only be for the debts themselves, rather than being punitive.