Trading While Insolvent

[tonyscott]

Hi, One of my customers, a LTD company, has not paid a very large outstanding invoice. The director informed me in a telephone conversation that the reason I have not been paid is because "they have no money"

As far as I am concerned he is trading while insolvent, and I very much doubt the company will trade back into a solvent position. I want to go for him personally for the debt. How do I go about this?

Secondly there is a major shareholder as well although they are not on the board, are they in any way liable for this too?

[Brett928S2]

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

[mrmr96]

Here's some HMRC guidance:
http://www.hmrc.gov.uk/manuals/insmanual/ins44320....
HTH

[esselte]

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

[mrmr96]

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

That's not true.

If a director continues to knowlingly trade whilst insolvent then this is one of the few occasions in which the veil of incorporation can be lifted and the directors persued personally.

HMRC said:

Section 214 IA 1986 provides a sanction against wrongful trading.

Under Section 214, a director of a company in liquidation may be ordered by the court to contribute personally to the assets (funds) in the liquidation.

The court will make such an order if the director knew or ought to have realised that the company was going to go into liquidation and yet he decided to carry on trading. This is called wrongful trading.

mrmr96 ACA ;-)

Edited by mrmr96 on Sunday 6th January 13:10

[Brett928S2]

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

[mrmr96]

Brett928S2 said:

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

Creditors can apply to the courts to have a company liquidated if it cannot meet the repayments.

[esselte]

Brett928S2 said:

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

So you're saying that a company has to be in bancruptcy before they are insolvent? Surely a company can be insolvent and not declare bancruptcy and that's why trading in this state is illegal?

Edited by esselte on Sunday 6th January 13:15

[Brett928S2]

mrmr96 said:

Brett928S2 said:

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

Creditors can apply to the courts to have a company liquidated if it cannot meet the repayments.

Hi

Yes you can force the Company into liquidation but its a long process and you still wont get your money as there will be a list of creditors with "preferential" ones first etc.....like banks...


All the best Brett

[mrmr96]

All "insolvent" means is that the company cannot meet its liabilities as they fall due. It is not a legal state. The first legal state a company will enter would usually be "adminstration" when an official Administrator is appointed whose primary task is to recover as much money on behalf of the creditors as possible. The administrator will, in the first instance, attempt to salvage the company if possible. If it is not possible then the company will enter a seccond legal state called Liquidation. AFAIK a company is never "bankrupt" as that's a term applied to individuals, but I'm willing to be corrected on that point if you can provide a reliable citation.

[mrmr96]

Brett928S2 said:

mrmr96 said:

Brett928S2 said:

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

Creditors can apply to the courts to have a company liquidated if it cannot meet the repayments.

Hi

Yes you can force the Company into liquidation but its a long process and you still wont get your money as there will be a list of creditors with "preferential" ones first etc.....like banks...


All the best Brett

That is true, but at least you get someone (an Adminstrator) working on your behalf to recover your moneny and you will get paid out before the shareholders. Plus, if the Directors have been trading wrongfully and there are not sufficient funds to pay off all the creditors then you can persue them personally. (See my quoting HMRC)

[streaky]

mrmr96 said:

Brett928S2 said:

mrmr96 said:

Brett928S2 said:

esselte said:

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

Even if they're trading whilst insolvent? I thought that was a big nono?

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

All the best Brett

Creditors can apply to the courts to have a company liquidated if it cannot meet the repayments.

Hi

Yes you can force the Company into liquidation but its a long process and you still wont get your money as there will be a list of creditors with "preferential" ones first etc.....like banks...


All the best Brett

That is true, but at least you get someone (an Adminstrator) working on your behalf to recover your moneny and you will get paid out before the shareholders.

But AFTER the Government, other preferential creditors and the Administrator/Liquidator - Streaky

[jamesuk28]

Brett928S2 said:

Hi

Nope...you cannot get him or anyone else personally...because its a LIMITED Company...that means the companies debts are LIMITED to the company and NOT the individual directors...

All the best Brett

If the company is trading while insolvent, ie it has no funds to meet its liabilities, and there is no realistic chance of trading back into a solvent position within a reasonable period of time, then the directors of that company (limited) ARE personally liable for the debts.

They cannot hide behind the veil of incorporation, and whats more its a criminal offence. The directors responsibilities are clearly laid out, and they should take them far more seriously or they will end up in deep sh1t.

Other posters mention forcing a company into liquidation, in cases of overdue debts that is usually prescribed via a Statutory demand under the Insolvency Act 1986, but its expensive to go the whole way (a winding up petition / order) and you are not guaranteed to get a penny.

Your first stop should be the Insolvency service, YHM also as we specialise in this kind of thing.

[JustinP1]

Brett928S2 said:

Hi

"Insolvent" is a technical word...usually used when a company has gone into bankruptcy but the OP has just ASSUMED hes insolvent (reading the original post).....just because he says he cannot pay a bill does not make him insolvent....

Well that *is* pretty much the definition of someone who is insolvent!? I don't know what your assumption of insolvent is?

My advice for the OP is to start talking to the company director straight away. It may be the case that after a Christmas closure period and a slow few days they are down on cashflow. However the situation may be more serious.

If they are having more problems, remember that the directors themselves may be losing a lot were the company to go bust, its probably not in their best interest unless they are doing a 'phoenix' job.

That said, they will be most likely prioritising their payments as to which ones allow the company to keep trading in order to try and play their way out of trouble. They will keep their staff going and will be paying suppliers in order that they threaten to withdraw facilities.

Rather than looking at expensive procedures that may not get a return if the company has little assets I would look at damage limitation. I would speak to the director and threaten further action, but you don't want to see them go under, and you understand their situation, yada yada...

Ask what you *can* have. Today. 70%, 50%, 20%, whatever you can get - remember that is better than nothing if it goes tits up. After that, ask them when exactly you can have the rest. If they can confidently give you a date, then say to agree to this then you would need the director(s) to personally guarantee this in writing.

• Then* you can see how confident they are. If you can get a director or two to take on the guarantee of the debt themselves to stop the company being shut down in means that you will then have some recourse should the company get wound up. If nothing else you can apply for a charge to be put on their property which would mean that you would get what is owed before they can move house.

Edited by JustinP1 on Sunday 6th January 20:51

[7db]

Spot on James.

A company is insolvent at the moment where it can't produce the cash to pay a creditor who has a debt due (such as the OP, if he can show that his debt was due immediately).

On personal Director liability, the rubber really hits the road in proving whether the Director could reasonably believe that the company could trade its way back to solvency with the information he should have had at the time.

If there's a way of eeking cash out, then that's much better than the nuclear option of a wind up.

[jamesuk28]

7db said:

Spot on James.

A company is insolvent at the moment where it can't produce the cash to pay a creditor who has a debt due (such as the OP, if he can show that his debt was due immediately).

On personal Director liability, the rubber really hits the road in proving whether the Director could reasonably believe that the company could trade its way back to solvency with the information he should have had at the time.

If there's a way of eeking cash out, then that's much better than the nuclear option of a wind up.

Thanks 7db, your comments are very valid too.

It does however annoy me that some people see fit to pass off their "wisdom" in such matters, when they clearly have no knowledge of the subject. That can be very damaging. If you do not know the answer then dont guess.

[JustinP1]

jamesuk28 said:

7db said:

Spot on James.

A company is insolvent at the moment where it can't produce the cash to pay a creditor who has a debt due (such as the OP, if he can show that his debt was due immediately).

On personal Director liability, the rubber really hits the road in proving whether the Director could reasonably believe that the company could trade its way back to solvency with the information he should have had at the time.

If there's a way of eeking cash out, then that's much better than the nuclear option of a wind up.

Thanks 7db, your comments are very valid too.

It does however annoy me that some people see fit to pass off their "wisdom" in such matters, when they clearly have no knowledge of the subject. That can be very damaging. If you do not know the answer then dont guess.

I agree with both of you.

I guess with online advice you get what you pay for!

If Brett is a Managing Director, presumably of a limited company perhaps this might be an eye-opener with regard to insolvency and personal liability too.

I do think though in most of these threads, the OP gets the right answer and hopefully a way forward in the end though.

[7db]

jamesuk28 said:

Thanks 7db, your comments are very valid too.

Thanks. Let's not turn this into a mutual back-slapping thread... I take my responsibilities as a director very seriously, not least as I know one of the chaps who used to represent the DfT at disqual. tribunals...

[mrmr96]

Thanks for repeating my comments.

[Brett928S2]

JustinP1 said:

jamesuk28 said:

7db said:

Spot on James.

A company is insolvent at the moment where it can't produce the cash to pay a creditor who has a debt due (such as the OP, if he can show that his debt was due immediately).

On personal Director liability, the rubber really hits the road in proving whether the Director could reasonably believe that the company could trade its way back to solvency with the information he should have had at the time.

If there's a way of eeking cash out, then that's much better than the nuclear option of a wind up.

Thanks 7db, your comments are very valid too.

It does however annoy me that some people see fit to pass off their "wisdom" in such matters, when they clearly have no knowledge of the subject. That can be very damaging. If you do not know the answer then dont guess.

I agree with both of you.

I guess with online advice you get what you pay for!

If Brett is a Managing Director, presumably of a limited company perhaps this might be an eye-opener with regard to insolvency and personal liability too.

I do think though in most of these threads, the OP gets the right answer and hopefully a way forward in the end though.

Hi

Yes I am the M.D of a limited company and I know precisely what my "personal liability" is...zero......under normal circumstances...

Going back to the Ops comments.....don't forget that he is owed money on a "business" debt, now when you provide goods or services in business you can ask for payment on delivery, in which case he would not be posting here....or he can allow the business he provides said good or services some credit time...anything from 1 day to several months......now if that business cannot pay him.....it is not totally their fault, he must take some blame for deciding to allow them credit....

One of the business we deal with recently was closed down through no fault of their own (a national insurance company decided to go into administration rather than paying various creditors)

Now this business went bust...owing us....not a huge amount but not insignificant either ...

They were good people and I just had to accept that I was not going to get the money back and live with it....

Now thats business.....

A few months later the MD of that company started a new smaller business and gave me stock to roughly the value of what he owed my company...

Now that was because he wanted to, not because he had to....and mainly because they really were "good people".....

I still trade with them and they get a LOT more leeway than others companies that I deal with...

All the best Brett

Edited by Brett928S2 on Sunday 6th January 22:58