What Are My Legal Duties as a Director When My Company Is Insolvent?
If your company is struggling financially, your responsibilities as a director change in important ways. Insolvency law places strict duties on directors and failing to follow them can lead to personal liability, financial penalties, and disqualification.
We covers what insolvency means, how your duties shift, and what steps you must take to stay compliant and protect yourself.
What does “insolvent” mean?
A company is considered insolvent when:
- It cannot pay its debts when they fall due (cash flow insolvency)
- Its liabilities exceed its assets (balance sheet insolvency).
Your duties shift: Creditors come first
Under normal circumstances, directors must act in the best interests of shareholders. However, when a company becomes insolvent or is approaching insolvency, the law requires directors to prioritise the interests of creditors instead. This is known as the creditor duty.
The worse the company’s financial position becomes, the more weight directors must give to creditors’ interests. When insolvent liquidation or administration is unavoidable, creditors’ interests become paramount.
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Key legal duties if your company is insolvent
If you know, or should know, that the company cannot avoid an insolvent liquidation or administration, you must take every reasonable step to reduce losses to creditors. This is crucial to avoiding or minimising personal liability.
You must not allow the company to take on significant new liabilities unless you are sure the company can pay them. An exception may be if the board considers that such liabilities are essential and in the best interests of the company and its creditors. Continuing to trade at a loss can expose you to personal liability.
Directors must keep accurate financial information, including:
- Cash flow forecasts
- Budgets
- Records of considered sources of funding
- Evidence of board discussions
- Updated financial statements
These records may later be used to determine whether you acted responsibly.
Meet frequently with fellow directors to understand the company’s financial position.
- Discuss the company’s financial state
- Consider future trading carefully
- Keep detailed minutes
- Circulate minutes promptly
Well kept minutes help demonstrate that you took responsible steps if your conduct is later examined.
Obtain advice from a licensed insolvency practitioner or solicitor as soon as financial difficulties arise. Advice should be specific to the company’s situation and properly documented.
Do not:
- Favour some creditors over others
- Transfer assets at below market value
- Repay positive directors’ loans ahead of other debts
These transactions can be reversed by insolvency practitioners once appointed and may increase your own liability.
If insolvency cannot be avoided, seek advice from an insolvency practitioner or solicitor, and consider ceasing to trade and a formal insolvency process. Directors cannot simply resign to avoid responsibility.
What you must not do
As a director, you must not:
- Ignore warning signs such as creditor pressure, cash flow problems, or unpaid tax
- Take on new debts without certainty they can be paid
- Delay raising concerns with the board
- Conceal financial information or fail to keep records.
- Resign to escape liability, past conduct can still be investigated
Possible consequences if you do not comply
Wrongful trading
If you continue to trade past the point where insolvency cannot be avoided, and do not take steps to minimise losses, you may be ordered to contribute personally to company assets.
Director disqualification
If your conduct makes you “unfit,” you may be banned from acting as a director for typically 2–15 years.
Personal liability
Breaching your duties may lead to being personally responsible for company debts, particularly in circumstances where you have allowed the company to incur new losses or engaged in improper transactions.
Formal insolvency procedures to consider
A legally binding agreement allowing the company to repay debts over time. Directors remain involved under the supervision of an insolvency practitioner.
An administrator takes control of the company to try to rescue it or achieve a better outcome for creditors. Directors’ powers are suspended without consent.
A process where assets are sold and the company is dissolved. There are two main types:
- Creditors’ Voluntary Liquidation (CVL)
- Members’ Voluntary Liquidation (MVL) (only if directors swear a declaration of solvency)
In liquidation, directors lose all authority once a liquidator is appointed.
Practical steps to protect yourself
- Keep financial information accurate and up to date
- Seek early, documented professional advice
- Hold and minute regular board meetings
- Record all funding discussions and options considered
- Keep personal notes of any disagreements
- Set a timetable for key financial milestones and monitor progress closely
Need expert guidance?
Facing insolvency can be stressful but acting quickly and responsibly can protect both creditors and your own position. Once insolvency is likely, your main duty is to the company’s creditors. By keeping detailed records, seeking prompt professional advice, and taking steps to minimise losses, you can reduce the risk of personal liability and ensure you meet your legal obligations.
If you suspect your company is insolvent, seek professional advice immediately, delay almost always worsens the situation.
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