Article written by Karl Hodson, UK Business Finance. Karl is responsible for helping businesses across the UK raise funding for a variety of purposes such as working capital, expansion and capital equipment. He has specialist knowledge of raising finance through invoice and asset-based lending, crowdfunding, loan and equity funds and Government schemes. Contact Karl Hodson Yorkshire and North East UK Business Finance Team E: karl@ukbusiness.finance www.ukbusiness.finance liable for repaying a compensatory amount back to the company to cover the antecedent transaction should it not be possible for the transaction to be reversed. Directors also face a disqualification order for up to 15 years if found guilty of either of these types of antecedent transactions. How to avoid trading while insolvent While many instances of insolvency are unavoidable, there are things a director can do to protect themselves, their company, and their creditors when dealing with a distressed limited company: 1. Be aware of the warning signs of impending insolvency – These can include cash flow issues, decreased sales, creditor’s threatening legal action, and the inability to obtain credit. 2. Regularly monitor the company’s financial position – Regular monitoring can allow for financial issues to be highlighted at an early stage. The sooner action is taken to stem a potentially ruinous situation, the more options are available when it comes to putting a rescue strategy in place. 3. Seek insolvency advice early – Swift insolvency advice will not only improve the chances of the company being able to effect a turnaround of its fortunes, it also demonstrates the desire for directors and shareholders to adhere to their legal responsibilities as the director of an insolvent company by taking action to minimise creditor losses. 4. Make transactions with care - Do not dispose of company assets, make preference payments, or be tempted to enter into a transaction at undervalue while the company is knowingly insolvent. While these may provide short-term relief, any subsequent investigation by an insolvency practitioner will see these antecedent transactions made void and directors will be opening themselves up to allegations of wrongful or even fraudulent trading. Entering into transactions while insolvent When a company is insolvent, extreme care should be taken when making a payment to creditors or otherwise entering into a transaction with another party. Favouring one creditor over another, or disposing of company assets for less than market value, are strictly prohibited once a company is insolvent. These are known as antecedent transactions and can be overturned by the appointed licensed insolvency practitioner should the company later enter into formal insolvency proceedings such as liquidation. • Preference Payments (Section 239 Insolvency Act 1986) – A preference payment occurs when an insolvent company pays a particular creditor ahead of others thereby putting the recipient into a better position than they otherwise would have been had the payment not been made. This is often done when repaying money owed to a connected party such as a friend or relative, paying a key supplier in order to maintain an ongoing business relationship, or repaying a loan a director has personally guaranteed. By making these payments the director is reducing the total amount available to the body of creditors as a whole, therefore breaching their fiduciary duties. • Transactions at Undervalue (Section 238 Insolvency Act 1986) – A transaction at undervalue occurs when a business asset is sold or transferred to another party for nil consideration or for a consideration significantly lower than its true market value. An example of this would be selling a vehicle owned by the company to the director’s spouse for a nominal amount. If an antecedent transaction is discovered as part of the liquidator’s investigations, they can bring a claim to have these transactions made void and reversed, restoring the company back into the position it would have been in had the transaction not been made. Directors can be made personally SPECIAL FEATURE 25 If a company is insolvent, expert advice must be sought in order to protect the company, its directors, and its creditors as a matter of urgency.
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