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When your business is insolvent, you need to stop trading. If found trading wrongfully or fraudulently, as a director you can be held personally liable for the debt and face a prison sentence. Wrongful trading and fraudulent trading are two different things and carry different penalties and liabilities.

If you are at risk of trading while insolvent, you should speak to an insolvency practitioner immediately. This will help you determine your next steps and make sure you avoid these two possibilities.

Wrongful Trading When Trading Insolvent

whichwaytotradeBusinesses that trade when they are insolvent are wrongfully trading. This occurs when the directors know that the company cannot clear its debts and will not be able to in the near future – within a 12 month period. Some businesses continue to trade believing that they can turn their business around but make it worse for themselves.

It is often poor judgment by the company directors. They didn’t continue to trade with intent of defrauding the creditors – they did it believing that they could turn their company around. This can also happen when the directors are not carrying out all their duties and responsibilities.

It is worth talking to an insolvency practitioner when you start to struggling financially. You may be able to turn your company around but it is not always the case. It doesn’t mean that you have to completely shut up shop – there are options to help keep the company open, such as a pre packed administration.

Fraudulent Trading When There Is Intent to Defraud

protect-yourselfWhen business owners continue to trade, knowing that they cannot turn the company around and are trying to defraud their creditors, they are trading fraudulently. The problem is that this is more difficult to prove when it goes to court. The courts will have to prove that the company directors were trading maliciously and had no intent to pay their creditors and not that they genuinely believed they could turn the company around.

Courts do not quickly jump to fraudulent trading but it does carry a harsher penalty. Directors can see themselves unable to own a company for 15 years after being convicted of fraudulent trading.

A pre pack administration is one option to help continue trading and sell the company but it can open directors up to fraudulent activity. This happens when directors continue to trade, even though they are insolvent, but with the intent to sell the company with high debts. The directors would not have to pay their debts in this instance and they have acted maliciously. It is always important to hire insolvency practitioners to make sure you go through the correct process to avoid a fraudulent trading conviction.

Once a company is deemed insolvent, they must stop trading. However, that doesn’t mean the door have to close completely. There are options available and a professional insolvency practitioner will be able to help with that, along with determining whether you can turn your books around and become solvent again.

Author bio:

Keith Tully has written many articles covering business topics for Real Business Rescue. Over the last year, he has covered topics such as tax, cash flow problems, the responsibilities of directors and insolvency options. Real Business Rescue offers advice to businesses in financial problems from professional and qualified insolvency practitioners.

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