As a director, you must stop your company from trading if it is unable to meet its debts. Otherwise, as a director, you could be sued personally by a liquidator or creditors (putting your own assets at risk) for the debts incurred whilst insolvent and even face criminal action.
A company is solvent if it can pay all its debts at the moment they are due for payment. The question which should be posed to ascertain whether a company is insolvent is this: Is the company able to pay all of its debts as and when they become due and payable?
The main determinant of a company’s solvency is based around the fact of whether debts are due and payable. Four factors should be taken into account as follows:
- all of the company’s debts (in order to determine when those debts were due and payable);
- all of the assets of the company (in order to determine the extent to which those assets are liquid or are realisable within a time frame that would allow each of the debts to be paid as and when they become payable);
- the company’s business (in order to determine its expected net cash flow from business by deducting from projected future sales the cash expenses which would be necessary to generate those sales); and
- arrangements between the company and prospective lenders such as its bankers and shareholders (in order to determine whether any shortfall in liquid and realisable assets and cash flow could be made up by borrowings which would be repayable at a later time than the debts).
To contravene the law, a director must either be suspect the company is insolvent or a “reasonable person” in a like position in the company, in the company’s circumstances would suspect the company is insolvent.
A regular occurrence of a few of the following 10 events by your company should cause you to become suspicious:
- continuing financial losses;
- bills being paid outside supplier trading terms;
- tax liabilities not being paid;
- supply terms being changed to cash on delivery “COD” terms;
- increasingly receiving letters of demands, solicitors’ letters and legal demands;
- large number of customers not paying their accounts on time;
- no up to date and accurate financial information;
- company cheques being dishonoured;
- knock-backs on finance applications;
- excessive reliance on family members and friends.
If at any time you are concerned your company is trading insolvent, or is in danger of doing so, you must consider putting the company into administration or liquidation to avoid breaching the law and personal liability for company debts.
Legal Practitioner Director
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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