If your company is struggling financially, or already facing insolvency, it’s vital to understand what the law expects of you as a company director. Your decisions carry real weight, and missteps at this stage can have personal consequences.
When you’re running a limited company in the UK, you’re legally obliged to follow the seven statutory duties set out in the Companies Act 2006. These include:
- Acting in good faith to promote the success of the company
- Using independent judgement
- Avoiding conflicts of interest
- Exercising reasonable care, skill and diligence
- Not accepting third-party benefits
- Declaring any interest in proposed transactions
- Following the company’s constitution
As long as your company is solvent, your main duty is to act in the best interests of the company and its shareholders. But if the company becomes insolvent, or is at serious risk of it, your legal focus shifts.
What changes when insolvency is on the table?
If your company is insolvent, your primary duty is no longer to the shareholders, it’s to the company’s creditors. That’s a significant legal change, and one that directors often overlook. From this point forward, you must act to protect creditors from further financial loss.
Failing to do so could lead to serious consequences, including personal liability, fines or director’s disqualification. If insolvency is a possibility, here’s what you’re legally expected to do:
1. Stop trading
If your company can’t pay its debts in full and when due, continuing to trade could be classed as wrongful trading. This means you knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency, and yet you carried on regardless. Wrongful trading could leave you personally liable for company debts.
2. Avoid preferences or transactions at undervalue
Certain transactions made before liquidation can be challenged. If you pay one creditor in full while others go unpaid, this might be seen as giving a preference. Similarly, selling company assets for less than market value is a transaction at undervalue.
3. Keep proper records and financial oversight
Insolvency law expects directors to maintain accurate records, even in tough times. If you fail to keep proper books and records, it can be used against you in a formal investigation.
This includes:
- Bank statements
- Loan agreements
- PAYE and VAT returns
- Director loan account records
- Management accounts
A lack of documentation can make it harder to justify your decisions, or to defend yourself against misconduct claims.
4. Seek professional advice promptly
One of the clearest signs of acting in creditors’ best interests is getting professional insolvency advice early. The longer you wait, the more likely it is that you’ll limit your options or be accused of dragging things out and worsening the outcome for creditors.
Bringing in a licensed insolvency practitioner shows that you’re taking your duties seriously. It also creates a clear audit trail that can help protect you if your actions are ever reviewed.
What happens if you breach your director’s duties?
If your company enters liquidation or administration, the Insolvency Service will review your conduct as part of the process. If they find you’ve breached your duties, several things can happen:
- You could be made personally liable for part of the company’s debts
- You might be disqualified from acting as a director for up to 15 years
- You could face criminal charges if fraud, dishonesty or wilful misconduct is involved
This scrutiny is especially intense when HMRC is a major creditor, or if there’s evidence of misusing government-backed loans like the Bounce Back Loan.
How do you know if your company is insolvent?
Directors aren’t expected to be forensic accountants—but you are expected to act on warning signs. Your company is likely insolvent if:
- It can’t pay bills as they fall due (cash flow insolvency)
- Its liabilities outweigh its assets (balance sheet insolvency)
- It has unpaid HMRC debts or creditor pressure, including statutory demands
- You’re unable to pay your Bounce Back Loan
If any of these apply, you need to take action so that you minimise the risk of trading while insolvent. The earlier you seek help, the more options you’re likely to have.
Can you protect yourself from personal risk?
Yes. While the duties are strict, the law does recognise directors who act responsibly. Here’s what will help your case if insolvency becomes unavoidable:
- Act early: Don’t wait until legal threats land on your desk
- Document decisions: Keep minutes of meetings and advice received
- Don’t favour yourself: Avoid repaying directors or family before other creditors
- Communicate honestly: Don’t mislead suppliers, lenders or staff
Voluntary liquidation, known as Creditors’ Voluntary Liquidation, could actually protect you by showing you took the right steps once insolvency was clear. It shifts legal control to a licensed practitioner and helps prevent further loss.
What about Bounce Back Loans and HMRC debt?
If your company owes money to HMRC or has an outstanding Bounce Back Loan, your actions as a director will be under the microscope.
HMRC may issue a Personal Liability Notice (PLN) if they believe you’ve been negligent or dishonest, especially if tax money was spent elsewhere or ignored. Likewise, misusing a Bounce Back Loan (which means using it for personal expenses or moving funds when the company was already insolvent) can lead to you being held personally liable for repaying the Bounce Back Loan.
These risks are often avoidable. Directors who seek help and act in good faith are less likely to face personal consequences.
Need advice on your duties as a director?
If your company is in financial trouble, your role as a director is to take it seriously and act responsibly. That doesn’t mean you have to save the business at all costs. It means understanding your legal duties and protecting creditors if recovery isn’t realistic.
Insolvency doesn’t have to mean disaster. With expert guidance, you can handle it legally, fairly and often in a way that lets you move forward.
If you’re unsure whether your company is insolvent, or worried about your personal exposure as a director, get in touch. Our licensed insolvency practitioners will explain your legal position in plain English, help you understand your options, and support you in making the right call.
If there’s any doubt at all, speak to a professional. We regularly review personal guarantees and can flag if something doesn’t look right, before it becomes a bigger problem.
