Once a company is insolvent, or bordering on insolvency, director duties shift from acting in the interests of shareholders, to taking creditors' interests into account. The most common mistake I see directors make is not realising the moment their legal duties change. Getting the timing of that shift wrong or acting too late is often how directors end up being held personally liable. This is exactly the point at which taking advice from a licensed insolvency practitioner makes a difference.
When do a director's duties change?
While a company is solvent, directors run the business in the best interests of its shareholders. As soon as the business is insolvent, or bordering on insolvency, that changes as directors need to start factoring in creditor interests.
In practice, that shift happens when directors know, or should know, that the company is either insolvent or nearing insolvency. It’s worth noting that this is a legal shift that all limited company directors must recognise, should they find themselves in this position.
Having worked as a licensed Insolvency Practitioner for over 20 years, I’ve seen both sides. Company directors that sought advice early had more control over the closure of their business. With liquidation unavoidable in many of these cases, company directors that acted early and entered voluntary liquidation had more control over the process.
Here’s an example of a case I handled where timing meant the difference between an orderly exit and a compulsory closure.
The director of a North-West based construction company specialising in new build fitouts could no longer maintain monthly payments to creditors. He delayed professional advice, hoping that one of his core contracts would be renewed, as promised. Following a change in management, the contract was awarded to another supplier.
From the point of recognising a problem to seeking professional help, creditor pressure escalated and company debts became unmanageable. After receiving threats of a winding up petition, he entered Creditors’ Voluntary Liquidation (CVL) to put an orderly end to creditor pressure.
What happens if directors get this wrong?
Once this shift happens, directors must understand that shareholders are no longer the only people with something to lose, company creditors are now exposed. If the company moves to the point where an insolvency procedure is inevitable, either voluntary or compulsory, the financial position of creditors is at serious risk.
If company directors ignore their responsibilities in the run-up and throughout the insolvency stage, they run the risk of personal liability. Depending on the facts, a director who continues trading, or who takes decisions that prioritise shareholders once this shift has happened, may face:
- Wrongful trading claims under the Insolvency Act 1986, if they continued trading after they knew or should have known there was no reasonable prospect of avoiding insolvency.
- Fraudulent trading claims, also under the Insolvency Act 1986, in more serious cases involving intent to defraud creditors.
- Director disqualification under the Company Directors Disqualification Act 1986, preventing them from acting as a director for a maximum of 15 years.
- Personal liability to contribute to the company's assets, ordered by the court.
Wrongful trading, in particular, can be established simply by showing a director carried on too long without taking the right advice at the right time — that's the scenario I see most often, and it's almost always avoidable.
Why early Insolvency Practitioner advice matters
Pinpointing exactly when a company crosses into insolvency depends on the financial position of the business at the time. This is precisely where a licensed Insolvency Practitioner adds value to protect company creditors and secure the future of the company. An Insolvency Practitioner can assess the company's financial position and advise directors on where they currently sit. Being able to demonstrate that you sought insolvency advice and acted upon it helps evidence that you fulfilled your responsibilities as a director.
In my experience advising owner-managed businesses across Yorkshire and the North East, the businesses that successfully weathered the storm and come out resilient were the ones that sought advice early. Once your negotiating power with creditors has expired, it’s hard to recover your financial position and facilitate a recovery.
If a company later enters liquidation and a director's conduct is investigated, having taken timely advice from a licensed Insolvency Practitioner is one of the clearest ways to demonstrate that this duty was taken seriously.
When should a director seek professional advice?
For directors carrying significant tax arrears, whether that is an overdue VAT bill, a PAYE shortfall, or corporation tax that has been deferred since the pandemic, professional insolvency advice must be sought without delay.
The clearest trigger is correspondence from HMRC indicating that a Time to Pay arrangement is at risk, that a debt has been passed to a field force officer, or that a winding up petition is being considered. At any of these stages, speaking to a licensed Insolvency Practitioner is appropriate.
However, the directors who tend to achieve the best outcomes are those who seek advice before HMRC reaches that point. A licensed Insolvency Practitioner works with business directors carrying HMRC debt on a regular basis. They understand how HMRC operates, their appetite for debt negotiations, and how a company's tax position fits into its broader financial picture.
