Company Insolvency Checklist: Steps For Directors to Take

Here is a checklist to assist you in protecting your business and yourself as a company director.

When a company is unable to pay its debts or is approaching that point, directors must follow strict legal duties. Failing to act correctly can lead to personal liability, disqualification, or even criminal consequences. The following guide summarises the key actions directors should take. 

1: Get up to date financial information

Obtain a clear and current picture of the company’s financial position. This includes cash flow forecasts, budgets, management accounts, and debt schedules. Warning signs include creditor pressure, late filings, covenant breaches, and only paying creditors after legal demands.

2: Seek professional advice without delay

Once insolvency becomes likely, directors are expected to obtain independent advice from an insolvency practitioner and legal advisers. All advice should be recorded, and it must relate specifically to the company’s situation. Professional guidance informs decisions, but directors remain responsible for ensuring the company acts in creditors’ best interests. 

3: Hold emergency board meetings and keep accurate minutes

Directors must meet frequently to assess the financial position and decide on next steps. Board minutes should fully document discussions, decisions, reasons, and any dissent. These records play a critical role if the company later enters liquidation or administration and the directors’ conduct is reviewed. 

4: Stop incurring new credit without professional clearance

Continuing to trade and take on new debts when there is no reasonable prospect of avoiding insolvency may lead to personal liability, for example, wrongful trading. Directors must scrutinise spending, avoid unnecessary liabilities, and refrain from entering into transactions that may later be challenged, such as preferences or transactions at undervalue. 

5: Prioritise creditors’ interests

When insolvency is imminent or unavoidable, directors’ duties shift from shareholders to creditors. Every decision must aim to minimise losses to creditors as a whole. Breaching this “creditor duty” can result in claims for misfeasance or compensation if the directors’ actions worsen the financial outcome for creditors.

6: Consider appropriate insolvency procedures

If the financial position cannot be recovered, directors must consider entering a formal insolvency procedure. Available options include administration, liquidation, a company voluntary arrangement (CVA), or a moratorium. Seek advice from an insolvency professional. Starting a formal process may help prevent further creditor losses and limit directors’ exposure to personal liability. 

7. Maintain comprehensive records and protect yourself

Directors should keep personal written records of meetings, advice received, funding options considered, and key decisions. Timelines showing when financial milestones must be met can help identify the point at which insolvency became unavoidable. Directors should also review their D&O insurance to ensure it covers insolvency related risks.