If you are trading whilst insolvent, you may be committing various offences including wrongful or fraudulent trading. When you are insolvent you are using up other people’s money, not your own, so the law will take a much closer look at what you are doing.
If you trade as a limited company, any creditor owed more than £750 can petition for the winding up of your business. This means you would go into compulsory liquidation and will have to deal with the Insolvency Service – a Government Agency. It will also mean you stop trading and the company’s bank account will be frozen. During this time, assets may not be removed or sold.
The purpose of liquidation is to sell your business and assets to pay pack all or part of your creditors. This process can take up to a year or potentially longer as during this time you will also be investigated.
The investigation process may lead to you being struck off or banned as a director. If you are found to have been wrongfully or fraudulently trading, you may also have to personally contribute to the losses to help pay back creditors.
In these later situations you should take good legal advice as you may have a valid defence.
If you are found to have been wrongfully or fraudulently trading, you may also have to personally contribute to the losses to help pay back creditors.
If you trade as a partnership or sole trader, you will be liable for all the debts, so wrongful or fraudulent trading does not make a difference. You can however be given a bankruptcy restriction order (“BRO”) lasting up to 15 years. This means your bankruptcy is not annulled after 12 months and you will stay bankrupt, meaning your assets will be sold in order to pay your creditors, and you may have to make an Income Payments Agreement if you have surplus income.
A Word of Advice
The worst cases I see of wrongful trading, directors being banned or bankruptcy restriction orders apply where the business owner just has no regard for anyone else and continue to run up liabilities with no real chance of paying them back.
Read more: The difference between bankruptcy and insolvency.