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Legal Issues Involved with Trading Whilst Insolvent

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In recent years there has been a lot of press given to directors and 'insiders' who participate in trading of an insolvent business. There are legal issues in virtually every country, but the UK has its own set of laws involving insider trading whilst insolvent. Perhaps the most notorious story that hit the news within the past couple of decades was Martha Stewart who knew her ventures were quickly becoming insolvent and traded shares to avoid losing money.

This is a criminal offense in the UK as it is in the United States and trading insolvent company shares can result in punitive as well as criminal liabilities. Specific guidelines have been established for trading while insolvent in terms of the length of time before the company is declared insolvent. Directors in the UK leave themselves open to being subject of preferential trading, transactions at undervalue and credit transactions that are considered extortionate. This can be the case if the company is currently insolvent or within 2 years prior to the onset of liquidation. However, the transaction would have to be with a 'connected person.' If the insolvent trading was with an unconnected person then the time allowance prior to liquidation is six months.

Added to punitive (monetary) and criminal charges would be the potential for director/s to be disqualified from future directorships under the Company Directors Disqualification Act of 1986. This act clearly states that a liquidator is responsible for reporting to The Department for Business Innovation and Skills (BIS) Disqualification Unit the conduct of all directors during insolvency. If he/she discovers any conduct of the director/s which is seen to be unfit management behaviour, it must be reported. This could result in that director, or those directors, being disqualified from future positions as a director. UK laws are quite strict on trading whilst insolvent.

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