When you can't Pay Your Debts



What Is Insolvency?
When a person in business or in partnership (with unlimited liability) is unable to pay their debts when they become due, they are said to be insolvent.

" As soon as someone is unable to pay debts they are technically insolvent ..."

As soon as someone is unable to pay their debts they are technically insolvent, even if they have more assets than liabilities. Unless they correct the situation that insolvency will move on to either bankruptcy or liquidation, depending on whether it is a company or not.

Insolvency is often referred to as the temporary state of bankruptcy, whereas bankruptcy is a permanent state of insolvency.


Insolvent Trading - Serious Consequences
When a company becomes insolvent the directors should look at ceasing trading.

Any debts that are incurred after the company is insolvent will become the responsibility of the directors. Insolvent trading occurs from the point that the directors knew or should have known that the company was insolvent and yet continued trading.

Any extra credit incurred after that time will be due by the creditors rather than the company.

The directors have a responsibility and a duty to stop incurring further debts at any time after they suspect that the business is insolvent. Failure to do so is an offence, which can attract both civil as well as criminal liability and results in the directors being personally liable for any losses suffered by any creditors.