When Insolvency Becomes Bankruptcy

• When a company is insolvent and there is no reasonable prospect to avoid the liquidation, the company should stop trading and avoid incurring further debt. This is designed to protect existing and future creditors. The rule is as old as law merchant and stands at the origin of the word bankrupt: once upon a time, when a dealer ran out of money, his table would be broken, so he could no longer trade.

• Directors who keep the company running may become personally responsible for the financial liabilities of the company.

  • For example, in England and Wales, courts can order directors to pay ‘contributions’ into the company’s assets. In Italy, the Civil Code makes directors liable to “preserve the company patrimony” for creditors. In the Czech Republic, directors who file late for insolvency can be made guarantors of the company debts in excess of the bankruptcy estate.

• “If a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud” (Lord Maugham)