By incurring additional trading losses and increasing the liabilities significantly (often to the Crown for PAYE/NIC/VAT -- who tend to take a dim view of such behaviour), the Directors are potentially exposed to personal liability for some of the debts. This personal exposure risk is due to the powers of the Liquidator to take action against a Director to make a personal contribution to the Liquidation, if there is evidence of insolvent trading and that the Director knew the company was insolvent, but instead of ceasing to trade, carried on and the situation got worse, not better. However, in reality, for directors of small companies, the risk of an insolvent trading action is low, as funds are often not available for the legal costs of an application to the High Court. In many cases, Directors can point out to reasons why they genuinely believed they could trade out of the insolvent position, such as the prospect of a cash injection from a new investor, or a profitable new contract in the pipeline. Only in extreme cases, where the Directors have clearly acted recklessly will action proceed.
