Oct 1

2026

What directors must do when a company is heading towards insolvency

A director’s legal duties do not wait for a formal insolvency process to begin. Well before a company appoints an administrator or enters a CVA, the law may already require you to consider creditors’ interests alongside shareholders’. That shift happens earlier than many directors realise. Get the timing wrong and you risk personal liability for losses the company goes on to suffer, even where there was no dishonest intent. Understanding when each duty applies is what actually protects you.

The duty you already have, and when it starts to change

Under section 172 of the Companies Act 2006, directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. That is the baseline duty every director operates under in normal trading conditions. What changes as a company runs into difficulty is not a completely new duty appearing from nowhere, but a shift in whose interests that existing duty requires you to consider.

The Supreme Court clarified that shift in BTI 2014 LLC v Sequana SA in 2022. The court held that directors must start considering creditors’ interests once they know, or ought to know, that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable. A real but remote risk of future insolvency is not enough. In Sequana, the company had paid a dividend years before it eventually became insolvent, and the court found the creditor duty had not arisen at that point because insolvency was not then imminent or probable.

How the duty actually escalates

Sequana also explained how much weight creditors’ interests carry as the position deteriorates, and this is where directors often misjudge their position. It is not all or nothing.

The Sequana creditor duty and the wrongful trading test are often talked about as though they are the same thing. They are not, and the distinction matters. The creditor duty arrives earlier and asks you to factor creditors into decisions. Wrongful trading arrives later, once you know or ought to know there is no reasonable prospect of avoiding insolvent liquidation or administration. At that point, balancing interests is no longer enough.

Wrongful trading: where personal liability actually bites

This is the point most directors have heard of, even if the earlier Sequana stage is less familiar. Once a director knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, section 214 of the Insolvency Act 1986 and the equivalent administration provision require them to take every step they ought to take to minimise potential loss to creditors. If a liquidator or administrator later shows this duty was breached, the court can order the director to personally contribute to the company’s assets, calculated by reference to the loss caused rather than capped at a fixed figure.

The test for what a director ought to have known is both objective and subjective: the general knowledge, skill and experience reasonably expected of someone in that role, and, if higher, the particular director’s own actual knowledge and experience. There is a defence if the director took every step, not merely every reasonable step, to minimise loss, but the courts apply that phrase seriously and the burden of proving it sits with the director. In our experience advising directors across Northern Ireland, Ireland and the UK, this is usually where formal advice, sought early enough, makes the biggest practical difference.

The other risks directors do not always see coming

Wrongful trading gets most of the attention, but it is not the only exposure. Civil fraudulent trading under section 213 of the Insolvency Act requires dishonest intent to defraud creditors and is rarer, but the same type of conduct can also create criminal exposure. Misfeasance claims under section 212 let a liquidator pursue a director for breach of duty, breach of trust or misapplication of company property without needing to prove dishonesty.

Two specific types of transaction get particular scrutiny once insolvency is involved. A transaction at an undervalue is where the company gave away more than it received, and it can generally be reviewed if it happened within two years before the onset of insolvency. A preference is where a creditor, often a connected one such as a director, family member or associated company, was put in a better position than they would otherwise have been in during the insolvency. Preferences are generally reviewable within six months, or two years for connected persons, provided the statutory insolvency and intention tests are met. Repaying a director’s loan account or friendly creditor just before a formal process starts is one of the most common ways directors unintentionally create a preference risk.

What directors should actually do right now

If your business is under pressure, a few practical habits genuinely change your position. Get proper advice as soon as the trend looks concerning, not once creditors have already started acting, since the Sequana duty and wrongful trading both turn on when you knew or ought to have known. Early advice is itself evidence that you were taking the position seriously.

Hold board meetings regularly and minute them properly, recording the information considered and the reasoning behind each decision. Those minutes are what a liquidator, or you, will be relying on later. Keep your management accounts and cash flow position current rather than working from stale figures, since you cannot show you took every step to minimise loss if you were not looking at accurate numbers in the first place.

Stop taking on new credit once there is genuinely no reasonable prospect of avoiding insolvent liquidation or administration, and be especially careful about repaying connected creditors or directors ahead of everyone else. Personal guarantees you have given remain enforceable regardless of how well you handle every duty above, because they sit outside company law entirely.

Watching for warning signs of financial distress early, and understanding what actually happens to creditors during a formal process, puts you in a far stronger position to choose the right route deliberately rather than having one forced on you.

What happens after: disqualification and compensation

Every insolvent liquidation triggers a review of directors’ conduct. The Insolvency Service can apply to disqualify a director for between two and fifteen years under the Company Directors Disqualification Act 1986 if that conduct shows they are unfit to be concerned in company management. Since 2015, the court can also make a compensation order where a disqualified director’s conduct caused a quantifiable loss to one or more creditors. That is separate from any wrongful trading contribution and can sit alongside it.

None of this requires fraud. Poor records, ignoring tax arrears, worsening creditor losses, preferring connected parties or continuing to trade without a realistic rescue plan can all become relevant when conduct is reviewed.

If your business trades across the UK and Ireland

Directors of Irish companies operate under a related but distinct framework. Reckless and fraudulent trading are dealt with under the Companies Act 2014, and Ireland’s restriction and disqualification regime, overseen by the Irish courts and the Corporate Enforcement Authority, does not mirror the UK’s periods or process exactly. Restriction can also have practical consequences for a director’s ability to act unless the relevant company meets statutory capital requirements.

A director sitting on boards either side of the border needs to know which regime applies to which company, rather than assuming UK case law like Sequana carries across automatically. Our cross-border accounting and tax team, alongside our recovery and restructuring specialists, regularly advises directors managing exactly this position.

Getting the position reviewed properly

The distance between a director who is protected and one who is personally exposed usually comes down to how early proper advice was sought and how well decisions were documented along the way. If your business is showing signs of strain, our insolvency practitioners can review your position, help you understand exactly which stage of duty currently applies, and set out the realistic options while you still have all of them available. Where conduct or transactions need independent scrutiny, our forensic accounting team can review the position properly rather than leaving it to guesswork. Get in touch with SCC Chartered Accountants before the decision is taken out of your hands.