A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for

director Director may refer to: Literature * ''Director'' (magazine), a British magazine * ''The Director'' (novel), a 1971 novel by Henry Denker * ''The Director'' (play), a 2000 play by Nancy Hasty Music * Director (band), an Irish rock band * ''D ...

s to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.

UK law

Under

UK insolvency law United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While Bankruptcy in the United Kingdom, UK bankruptcy law concerns the rules for natural persons, the term ''insolvency'' is generall ...

, trading once a company is legally insolvent can trigger several provisions of the

Insolvency Act 1986 The Insolvency Act 1986 (c. 45) is an act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK. History The Insolvency Act 1986 followed the publication ...

, including: *

Wrongful trading Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the inso ...

– Section 214 *

Transaction at an undervalue Transaction or transactional may refer to: Commerce *Financial transaction, an agreement, communication, or movement carried out between a buyer and a seller to exchange an asset for payment *Debits and credits in a Double-entry bookkeeping syst ...

– Section 238 *

Preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision the ...

– Section 239 *Extortionate credit transactions – Section 244 A limited company becomes

insolvent In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet in ...

when it can no longer pay its bills when due, or its liabilities—including

contingent liabilities In accounting, contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as the outcome of a pending lawsuit. These liabilities are not recorded in a company's accounts ...

such as

redundancy payments A layoff or downsizing is the temporary suspension or permanent termination of employment of an employee or, more commonly, a group of employees (collective layoff) for business reasons, such as personnel management or downsizing an organization ...

—outweigh the company’s assets. This is a critical point in the lifespan of a company as it denotes when the

directors Director may refer to: Literature * ''Director'' (magazine), a British magazine * ''The Director'' (novel), a 1971 novel by Henry Denker * ''The Director'' (play), a 2000 play by Nancy Hasty Music * Director (band), an Irish rock band * ''D ...

' responsibilities move from the interests of

shareholders A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

to the interests of

creditors A creditor or lender is a Party (law), party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided ...

. It also means that the directors need to be extremely careful when considering whether to continue to trade, or not. Any director who knows that the company is insolvent and makes the decision to continue to

trade Trade involves the transfer of goods and services from one person or entity to another, often in exchange for money. Economists refer to a system or network that allows trade as a market. Traders generally negotiate through a medium of cr ...

, and in doing so increases the debts of the company can be made liable for the company debts. 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 The Company Directors Disqualification Act 1986 (c. 46) forms part of UK company law and sets out the procedures for company directors to be disqualified in certain cases of misconduct. History Lord Millett, in the opinion he gave in , summari ...

. Under the provision of this act, when a company goes into

liquidation Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...

, the liquidator must make a report to the Disqualification Unit of the

Department for Business, Innovation and Skills The Department for Business, Innovation and Skills (BIS) was a ministerial department of the Government of the United Kingdom. It was created by the Gordon Brown premiership on 5 June 2009 by the merger of the Department for Innovation, Uni ...

on the conduct of all directors. If the liquidator has come across any 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 Department for Business, Innovation and Skills will apply to the Court for an order disqualifying the director or directors from acting as a

company director A board of directors is a governing body that supervises the activities of a business, a nonprofit organization, or a government agency. The powers, duties, and responsibilities of a board of directors are determined by government regulations ...

for a certain period of time.

Other countries

Many other countries have similar laws, often referred to as 'insolvent trading' or

wrongful trading Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the inso ...

References

{{reflist Insolvency law of the United Kingdom Business law United Kingdom company law

UK law

Other countries

See also

References