Director Duties When a Company Is Insolvent

A company may be insolvent if: 

• it cannot pay debts as they become due, known as cash-flow insolvency; or 
• the value of its liabilities exceeds the value of its assets, taking contingent and future liabilities into account. 

Warning signs can include overdue tax, unpaid suppliers, returned payments, persistent use of emergency borrowing, legal demands or an inability to meet payroll. 

One cash-flow problem does not always provide a complete answer. Directors should use current management accounts, realistic cash-flow forecasts, asset values and the timing of liabilities to understand the company’s position. 

Review the company’s financial position 

Decisions should be based on reliable, up-to-date information. 

Directors should review: 

• current bank and cash positions; 
• debts due and their payment dates; 
• overdue tax and creditor balances; 
• realistic sales and collection forecasts; 
• payroll and other essential costs; 
• assets available to the company; 
• secured borrowing and personal guarantees; 
• ongoing contracts and customer obligations. 

If the figures are incomplete, directors should take reasonable steps to correct them before making major decisions. 

Hold regular board meetings and record decisions 

Important decisions should be considered by the board rather than left undocumented or controlled by one individual. 

Minutes should record: 

• the financial information reviewed; 
• the available options; 
• advice received; 
• the expected effect on creditors; 
• why trading continued or stopped; 
• why significant payments or transactions were approved. 

Minutes will not make an improper decision acceptable, but clear contemporary records can show that directors considered the right issues and acted responsibly. 

Protect company assets 

Company money, property, vehicles, stock, equipment, intellectual property and debts owed to the company should be protected. 

Directors should not: 

• gift company assets; 
• sell assets substantially below their proper value; 
• transfer assets to themselves or a connected business without proper justification; 
• hide or remove assets from creditors; 
• allow company property to be used for personal purposes without authority. 

Obtain appropriate valuations for significant disposals and record the commercial reason for the transaction. 

Consider creditors as a whole 

The purpose is not necessarily to ensure every creditor receives identical payments at every point. It is to avoid decisions designed to benefit one creditor, shareholder or connected person unfairly at the expense of the general creditor body. 

Directors should be particularly cautious about: 

• repaying money owed to themselves; 
• paying relatives or connected companies; 
• repaying personally guaranteed borrowing mainly to reduce their own exposure; 
• paying dividends or taking drawings when they are not properly supported; 
• transferring funds shortly before entering liquidation or administration. 

Some selective payments may be commercially necessary—for example, paying an essential supplier where doing so genuinely protects business value and improves the likely outcome for creditors. The reason should be properly considered and documented. 

Be cautious about new credit and customer payments 

Continuing to order supplies or take customer deposits when the company is unlikely to fulfil the resulting obligations can worsen creditor losses. 

Before taking on a new commitment, directors should consider: 

• whether the company is reasonably likely to fulfil it; 
• how it will be funded; 
• whether the contract is profitable; 
• whether accepting the commitment improves or worsens the creditor position; 
• what happens if the anticipated rescue or funding does not materialise. 

Optimistic forecasts should be supported by credible evidence rather than hope alone. 

Not automatically. 

A company may sometimes continue trading while directors assess a rescue, refinancing, sale, Company Voluntary Arrangement or administration. A short period of controlled trading may also preserve jobs, complete profitable work or produce a better outcome for creditors. 

However, continuing to trade becomes increasingly risky where: 

• losses are continuing without a credible recovery plan;
• new debts are being incurred without a reasonable prospect of payment; 
• rescue funding is speculative; 
• customer orders cannot be fulfilled; 
• records are unreliable; 
• the company has no realistic route away from insolvent liquidation or administration. 

The decision should be reviewed frequently. A decision that was reasonable one week may cease to be reasonable when funding fails, a major customer leaves or creditor action escalates. 

Wrongful trading is not simply operating a company while it is insolvent. 

It can arise where a company later enters insolvent liquidation or administration and a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding that outcome. 

A director may avoid a contribution order if, after reaching that point, they took every step they ought to have taken to minimise potential loss to creditors. 

Relevant steps may include: 

• obtaining appropriate advice; producing and reviewing reliable forecasts; 
• reducing avoidable expenditure; 
• stopping loss-making activity; 
• protecting assets; 
• avoiding additional credit that cannot reasonably be repaid; 
• pursuing a realistic rescue or orderly insolvency process; 
• recording decisions and their supporting evidence. 

Read our complete guide to wrongful trading for the detailed statutory test. 

Directors are not normally personally responsible for company debts merely because the company becomes insolvent. 

Personal exposure may nevertheless arise through: 

• personal guarantees; 
• an overdrawn director’s loan account; 
• wrongful or fraudulent trading; 
• misfeasance or breach of duty; 
• improper transactions involving company property; 
• certain compensation or contribution orders; 
• specific HMRC joint and several liability provisions. 

The consequences depend on the conduct and loss involved. An unsuccessful company does not automatically mean that its directors have acted improperly. 

Our guide to being personally liable for company debts explains these exceptions in more detail. 

If an administrator, liquidator or the Official Receiver is appointed, directors must cooperate with the office-holder. 

This generally includes: 

• providing company books and records; 
• answering questions about the company’s affairs; 
• supplying information about assets and transactions; 
• completing any required questionnaire or statement of affairs; 
• attending meetings when reasonably required. 

The office-holder may also examine the causes of insolvency and the conduct of directors. 

An investigation does not automatically mean wrongdoing is suspected. Directors who maintained records, considered creditors, sought appropriate advice and cooperated with the process are in a much stronger position to explain their decisions. 

The appropriate response depends on whether the underlying business remains viable and whether creditor losses can be controlled. 

Potential options may include: 

• an informal agreement with creditors; 
• refinancing or new investment; 
• an HMRC Time to Pay arrangement; 
• cost reduction or business restructuring; 
• a Company Voluntary Arrangement; 
• administration or a moratorium; 
• an orderly sale of the business or assets; 
• a Creditors’ Voluntary Liquidation. 

Liquidation is not automatically the correct answer simply because a company has debt. Equally, directors should not continue trading indefinitely where there is no credible route to recovery.