Directors' Duties When a Company Is Insolvent (UK Guide)

Once a company is insolvent, or close to it, its directors must give real weight to creditors' interests, not just shareholders'. Getting this wrong can mean personal contributions to the company's assets, reversed transactions and disqualification for up to 15 years. The best protection is acting on warning signs early, recording your decisions and taking advice from a licensed insolvency practitioner.

When directors' duties shift towards creditors

Section 172 of the Companies Act 2006 normally requires directors to promote the company's success for the benefit of its shareholders as a whole. Section 172(3) makes that subject to any rule of law requiring directors, in certain circumstances, to consider or act in creditors' interests.

In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court confirmed this "creditor duty":

• The majority held it is engaged when directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable. A real and not remote risk of insolvency is not enough.
• Directors must then balance creditors' interests against shareholders' where they conflict, giving creditors more weight as the position worsens. Once insolvent liquidation or administration is inevitable, creditors' interests are paramount.
• Shareholders cannot ratify a breach, and the duty can apply even to an otherwise lawful dividend.

In the case itself, a €135 million dividend paid in 2009, when insolvency was a real risk but not probable, did not engage the duty.

Warning signs and what to do

Typical warning signs:

• suppliers paid late, or only when they chase;
• VAT, PAYE or National Insurance arrears;
• an overdraft stuck at its limit, or new borrowing used to repay old debts;
• statutory demands, county court judgments or a threatened winding-up petition;
• management accounts showing liabilities greater than assets.

If you recognise them:

1. Know the numbers. Keep management accounts current and run a rolling 13-week cash-flow forecast.
2. Minute board decisions, the advice received and your reasons: your best evidence if your conduct is questioned.
3. Stop taking on credit you can't repay, including customer deposits.
4. Treat all creditors the same, as Insolvency Service guidance puts it. Don't repay yourself, connected businesses or debts you personally guaranteed ahead of others, and don't sell assets cheaply.
5. Take advice early from a licensed insolvency practitioner, while rescue options remain open.

Wrongful trading and fraudulent trading

Wrongful trading (section 214 of the Insolvency Act 1986) applies when a company enters insolvent liquidation or, since October 2015, insolvent administration. The court can order a director to contribute personally to the company's assets if, beforehand, they knew or ought to have concluded there was no reasonable prospect of avoiding that outcome. It is a civil claim, needs no dishonesty and covers shadow directors.

• You are judged by what a reasonably diligent person in your role would know and do, or by your own higher skill and experience.
• The defence is proving you then took every step you ought to have taken to minimise creditors' potential loss.

Fraudulent trading (section 213) means carrying on business with intent to defraud creditors or for any fraudulent purpose. Anyone knowingly party to it can be ordered to contribute, and it is also a crime under section 993 of the Companies Act 2006, carrying up to ten years' imprisonment.

Misfeasance, preferences and undervalue transactions

Liquidators and administrators can also challenge earlier transactions:

• Misfeasance (section 212). In a liquidation, a director who misapplied or kept company money or property, or breached a duty to the company (including the creditor duty), can be ordered to repay it or pay compensation. There is no fixed look-back period.
• Preferences (section 239). Anything that puts a creditor or guarantor in a better position than they would have in an insolvent liquidation, influenced by a desire to do so. The look-back is six months, or two years for connected persons such as directors and their relatives, where that desire is presumed. Repaying a director's loan to the company, or an overdraft a director guaranteed, are classic examples.
• Transactions at an undervalue (section 238). Gifts, or sales for significantly less than value, within two years, unless made in good faith for the business with reasonable grounds to believe they would benefit the company.

For the last two, the company must have been unable to pay its debts at the time or as a result (presumed for undervalue transactions with connected persons). Periods run back from the "onset of insolvency", broadly when the administration or liquidation began.

Re-using the company's name

Under section 216, anyone who was a director or shadow director in the 12 months before a company went into insolvent liquidation cannot, for five years, be a director of, or involved in running, a company or business using the same name (including a trading name) or one similar enough to suggest an association. Breach is a crime, and section 217 makes you personally liable for debts incurred while you were involved.

Besides court permission, the Insolvency (England and Wales) Rules 2016 allow three exceptions (see the Insolvency Service guide):

• buying the whole or substantially the whole of the business from an insolvency office-holder, and notifying creditors and The Gazette before acting and no later than 28 days after completion, as in some pre-pack administrations;
• applying to court within seven business days of the liquidation, which lets you act for up to six weeks or until the court decides;
• the other company has used the name for the full 12 months before the liquidation and was not dormant.

Director disqualification

Under the Company Directors Disqualification Act 1986, the liquidator, administrator or Official Receiver must send the Insolvency Service a conduct report on everyone who was a director in the three years before the insolvency, within three months. The Insolvency Service decides whether action is in the public interest; proceedings must normally start within three years.

• Order or undertaking. A court can disqualify you for 2 to 15 years for unfit conduct, or you can give a voluntary disqualification undertaking with the same effect and no court hearing.
• Effect. You cannot be a director, or take part in promoting, forming or managing a company, without court permission. Breach is a crime and can make you personally liable for company debts. Bans appear on the Companies House register.
• Compensation. Since 2015 the Insolvency Service can also seek, within two years of the ban, an order that you compensate creditors who lost money through your conduct.
• Dissolved companies. Since 15 February 2022, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 has extended these powers to directors of companies dissolved without a formal insolvency, including for past conduct.

Personal exposure beyond the company

Limited liability protects you from most company debts, but not from:

• Personal guarantees you signed for loans, overdrafts, leases or supplier accounts.
• An overdrawn director's loan account. Money you owe the company must still be repaid after insolvency, and a liquidator can sue for it. Dividends paid without enough profits are usually treated as loans.
• HMRC notices. If unpaid National Insurance contributions are attributable to a director's fraud or neglect, HMRC can issue a personal liability notice for them, plus related interest and penalties. These don't cover PAYE income tax, but since 2020 HMRC can issue joint and several liability notices for company tax debts in avoidance, evasion or repeated-insolvency cases.
• Bounce Back Loan misuse. The loans carried no personal guarantee, but borrowers declared the money was for the business's economic benefit, not personal purposes. Misuse can bring misfeasance claims, disqualification, compensation orders and, for false applications, fraud prosecutions.

Your role in liquidation, administration or a CVA

• Liquidation. Your powers end when the liquidator is appointed. You must co-operate: complete a statement of affairs or questionnaire, hand over records and property, and attend interviews. Refusing can lead to court orders, fines or an arrest warrant. See the liquidations list.
• Administration. The administrator runs the company. You stay in office but need their consent to exercise management powers, and must co-operate. See current administrations.
• CVA. You keep running the business, monitored by a supervisor, and must deliver what creditors approved. If it fails, liquidation or administration may follow; see CVA vs CVL.

Frequently asked questions

Am I personally liable for my company's debts?

Usually not, except through personal guarantees, money you owe the company, or the claims and notices above.

Does resigning as a director protect me?

No. You remain answerable for decisions made in office, and conduct reports cover directors from the previous three years.

Will I be investigated if my company fails?

A conduct report is filed in every insolvent liquidation and administration, but proceedings follow only where the Insolvency Service considers disqualification in the public interest.

Can I keep trading while I take advice?

Sometimes, if continuing is likely to reduce creditors' overall losses. Record your reasons, review the position often and take no credit you can't repay.

Can I just dissolve the company instead?

Not to escape its debts: creditors can apply to restore it, and its directors can still be disqualified. Solvent companies can use a members' voluntary liquidation; insolvent ones usually need a CVL.

General information on the law in England and Wales, not legal advice. If your company is struggling, speak to a licensed insolvency practitioner or solicitor early.