Companies in crisis: Should my company continue to trade if I know that it has no way of paying all its debts?

As we enter another national lockdown the government has announced it will give out grants to businesses in retail, hospitality and leisure to help them keep them afloat. This is in addition to business rates relief and the furlough scheme extension to help protect jobs and keep companies running. Despite this support, the latest restrictions could be the ‘final blow’ for struggling businesses who may be forced to close for good.

In the next instalment of companies in crisis, our Q&A series for company directors, senior litigation lawyer Alexander Neale explains what your responsibilities are if your company has no way of paying back its debts.

Key points

• If you think that your company cannot pay its debts and will need to enter formal insolvency, as a director you should not allow the company to continue trading.
• The main concern should be how continued trading may affect the monies available to be distributed to existing creditors.
• If you allow the company to incur additional creditors when you know the company is insolvent, you can be found guilty of wrongful trading under section 214 the Insolvency Act 1986.
• A court can order you (and any other company directors) to personally pay the debts incurred during this period.

If you think your company may become insolvent, you should always seek immediate professional advice. Our insolvency experts can talk you through your options.

To watch previous videos from our companies in crisis series, please click on the titles below.

• Part one: I am concerned for the future of my company because of Covid-19. What steps should I take?
• Part two: I have signed personal guarantees to my company’s lenders but what happens if the company then becomes insolvent?
• Part three: How can I tell if my company is insolvent? 
• Part four: My company is receiving pressure from creditors but it can’t afford to pay what it owes. I think that my company is now insolvent, what options do I have?
• Part five: Should my company continue to trade if I know that it has no way of paying all its debts?
• Part six: If my company is placed into an insolvency process, how will this affect me?
• Part seven: What duties do I owe as a company director and do my duties change if the company becomes insolvent?
• Part eight: My company is due monies from several customers. What steps can I take?