By Ellen Ferris, a Solicitor in Matthews Folbigg’s Insolvency, Restructuring and Debt Recovery Group
In the current climate, many accountants may have clients experiencing financial distress, including directors seeking advice on how to avoid personal liability for trading whilst insolvent.
What advice should accountants be giving their clients in this environment? What advice do directors need to hear?
Insolvent Trading – The Danger
Firstly, it is important to understand how the law defines insolvent trading. The law defines insolvency as an inability to meet debts as and when they are due and payable. Insolvent trading, in simple terms, relates to debts incurred whilst a company is insolvent.
Secondly, however, determining insolvency at any point in time is a very complex assessment. It does not include a temporary shortage of liquidity, but looks at the company’s assets as a whole and its cash-flow. In the current COVID-19 climate, many businesses will be experiencing temporary liquidity problems, however the questions is whether these are going to lead to longer term shortages of capital. Given what is going on in the world, who knows?