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Trading while insolvent
From Wikipedia, the free encyclopedia
In many legal systems, once a company becomes insolvent, the directors have to take particular care. Under UK law, trading while insolvent can trigger several provisions under the Insolvency Act 1986 which may have the effect of making directors of a company personally liable to contribute to the assets of a company.
The relevant provisions of the Insolvency Act 1986 include:
- Wrongful trading - Section 214
- Transaction at an undervalue - Section 238
- Preferences - Section 239
- Extortionate credit transactions - Section 244
Under wrongful trading legislation in the UK, if the company continues to trade while it is insolvent the directors of the company may become personally liable to contribute to the company's assets and help meet the deficit to unsecured creditors if the company's financial position is made worse by the directors continuing to trade instead of putting the company immediately into liquidation.
In most legal systems, the liability in respect of other transactions only extends for a certain period of time prior to the company going into liquidation. In the UK, directors are exposed in respect of transaction at an undervalue, preferences, and extortionate credit transactions if the transaction occurred: a) while the company was insolvent; and b) within 2 years before the onset of liquidation if the transaction was with a connected person, and 6 months if the transaction was with an unconnected person.
Directors who continue to trade while insolvent may face disqualification under the Company Directors Disqualification Act 1986. Under the provision of this act, when a company goes into liquidation, the liquidator must make a report to the Disqualification Unit of the Department of Trade and Industry on the conduct of all directors. If the liquidator has come across conduct which makes the director unfit to be involved in the management of a company in the future (which things would include trading while insolvent) the DTI will apply to the Court for an order disqualifying the director or directors from acting as a company director for a certain period.
Many other countries have similar laws, often referred to as 'insolvent trading' or wrongful trading.