One of the first questions that directors normally ask me is “Should we be worried about wrongful or fraudulent trading?”
Well the answer is: Yes, but actually cases of this are rare.
There is a far bigger risk to them which occurs when they know they are insolvent and before they decide to close. Known as the ‘twilight zone’, it is during this time they can commit various other offences.
Directors who continue trading have a duty to make sure:
- All creditors are treated and paid equally so one is not favoured above another.
- No assets are given away or undersold.
- They don’t put themselves in a better position by continuing to trade – a common example of this is paying down an overdraft that was guaranteed.
- They avoid using a new supplier and not paying them which can leave the directors personally liable if the supplier can prove the directors knew they could never pay for the orders.
It is often in this ‘twilight zone’ that directors run into most problems. They think they can make the finances better for creditors, for example by running stock down or finishing work-in-progress, but the daily battle they have is who to pay or not and who can be told or not.
It is not uncommon for directors to meet us, go away thinking they will carry on for a month or two, but then almost immediately come back asking us to help close the business.
If you have clients who need impartial and common sense advice please ask them to call us? We can help with;
- Keep going versus closure?
- Creditors Voluntary Liquidation versus Compulsory Liquidation?
- Pre-pack Administration versus Administration
- How feasible is a Company Voluntary Arrangement?