If a company is struggling with its debt obligations, insolvency might be an option the company directors should consider. Trading a company whilst it is insolvent is a breach of director’s duties and might expose directors to personal liability for the company’s debts.
When is a company insolvent?
A company is considered insolvent when it becomes unable to pay its debts as and when they fall due. Once this has occurred, the company should not be incurring any further debt, as that might mean it is trading whilst insolvent.
To successfully pursue a director for insolvent trading, the company must have incurred a debt after becoming insolvent. At the time the company incurred the debt, the directors must at the very least have had reasonable grounds to expect that the company was insolvent and yet failed to prevent the company from incurring that debt.
Directors who fail to prevent insolvent trading may face both criminal and civil penalties if they are found to be in breach. As such, caution must be exercised when it comes to the solvency of a company. Directors should be across a company’s affairs and investigate any instances of financial difficulty the company may encounter. If the directors are unsure about an issue, they should obtain advice.
At Straits Lawyers, we provide advice to all facets of business on possible insolvency issues. If companies are already facing insolvency, we can provide advice on the best possible options in the circumstances. We have successfully advised both creditors and debtors in the past regarding liquidations, administrations, receivership and winding up.
If you would like to discuss any of these matters further, simply email us at email@example.com or call at 08 8410 9069 to arrange an appointment.
Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.