Trading while insolvent means carrying on business when your company can’t pay its debts in full and as they fall due. On its own, being insolvent isn’t a crime. But continuing to trade without taking proper action can put you at serious personal and legal risk.
The law is designed to protect creditors. If you know (or ought to know) that your company has no realistic chance of recovery, yet you carry on running up more debt, you could be accused of wrongful trading. In the most serious cases, where there’s deliberate dishonesty, this crosses into fraudulent trading, which is a criminal offence.
Understanding the difference, and acting quickly when insolvency arises, is vital to protecting yourself as a director.
What does it mean to be insolvent?
There are two main ways to identify insolvency:
- Cash-flow test: can your company pay its bills in full and as they fall due?
- Balance sheet test: do your liabilities outweigh your assets?
If either test shows your business is insolvent, the law requires you to put creditors’ interests first. Carrying on “business as usual” without addressing the issue could mean you’re putting yourself personally on the line.
Wrongful trading explained
Wrongful trading happens when directors keep trading past the point where they knew, or should have known, there was no reasonable prospect of avoiding insolvent liquidation.
In practice, this means:
- You keep taking customer deposits you can’t fulfil
- You order goods or services knowing you can’t pay suppliers
- You continue paying yourself while not paying HMRC or creditors
If a licensed insolvency practitioner later investigates and finds evidence of wrongful trading, the court can order you to contribute personally to company debts.
Fraudulent trading: the criminal offence
Fraudulent trading is more serious. It’s not about poor judgement, it’s about intent.
This applies if you deliberately set out to deceive creditors, lenders or customers. Examples include falsifying accounts, taking orders with no intention of delivering, or transferring assets to avoid them being sold for creditors’ benefit.
Fraudulent trading can lead to:
- Personal liability for company debts
- Director’s disqualification (up to 15 years)
- Criminal charges, fines and even imprisonment
How to avoid accusations of illegal trading
Directors aren’t expected to predict the future. But you are expected to act responsibly once warning signs appear. Steps that help protect you include:
- Keeping accurate, up-to-date financial records
- Taking professional advice as soon as insolvency is suspected
- Pausing dividends or director drawings if the company can’t pay debts
- Engaging with creditors honestly rather than ignoring them
- Considering formal options like a Company Voluntary Arrangement (CVA), Administration or Creditors’ Voluntary Liquidation (CVL)
The key is to show that you acted reasonably, sought advice and tried to minimise losses to creditors.
What happens if you’re already trading while insolvent?
If your company is insolvent and still trading, you should seek urgent advice from a licensed insolvency practitioner. They’ll help you assess whether the business has a realistic future or whether liquidation is the safest route.
Formal liquidation, through a Creditors’ Voluntary Liquidation (CVL), allows you to shut the company down properly. The licensed insolvency practitioner will investigate the company’s affairs. But if you can show you acted responsibly, you’re less likely to be accused of wrongful trading.
Key takeaways for ‘Is it illegal to trade insolvently?’
- Trading while insolvent isn’t automatically illegal, but it becomes unlawful if you don’t act in creditors’ best interests.
- Wrongful trading can make you personally liable for company debts.
- Fraudulent trading is a criminal offence with severe penalties.
- Acting early, by seeking professional advice, can protect you from personal and legal risk.
Need advice right now?
If you think your company is insolvent, don’t risk making things worse. Our licensed insolvency practitioners will talk you through your options clearly and confidentially, so you can decide the safest next step. Get free, confidential advice today.
