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Tuesday, 13 May 2014

Directors of insolvent businesses must act properly and legally

As a director, you may have been trading profitably for many years and have always paid your bills on time. However, when the company gets into cashflow difficulties, as a director you need to make changes to the way you act. If the business is insolvent, then you have a legal obligation to do so.

Common mistakes that distressed company directors make are:

- Trading whilst insolvent which is simply carrying on trading when the business has no chance of paying creditors
- Creating preferences (paying one creditor over another )
- 'Transactions at an undervalue' (selling assets of the insolvent company to another company at a knock down price)
- Wrongful trading (this is like trading whilst insolvent except that you do it knowingly or even fraudulently)
- Failing to submit tax returns and tax payments

The best thing you can do is get advice quickly. The sooner you seek advice, the better chance you have of avoiding wrongful trading and personal liability.

Remember that if your company is insolvent, you have a legal duty to maximise creditors' interests.

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