Director Protection During Company Insolvency: How to Reduce Personal Risk

The fear that brings most directors to this page is not that the company fails. It is that the failure follows them home.

You have probably already worked out that the company is in trouble. What you do not yet know is how much of that trouble is yours personally, and which of the things you are doing this week might make it worse.

Both are answerable. In most cases limited liability holds, and the handful of ways a company’s debts can reach a director are narrower than they feel at three in the morning.

But they are real, and almost all of them turn on decisions taken in the months before a liquidator is appointed rather than anything that happens afterwards.

By the time a director calls us, the damaging decisions are usually already made. Not through dishonesty, in the cases we handle, but through instinct.

Paying the supplier who shouted loudest. Repaying money the company owed them, before things got worse. Moving a van into a spouse’s name to keep the family safe.

Each one felt protective at the time. Each one is the first thing a liquidator looks for.

Director Protection at a Glance

Three questions matter more than the rest, and you can answer all three today.

Am I personally at risk? Usually only for four things: a guarantee you signed, money you have drawn out of the company and not repaid, tax where your own conduct is in question, and money paid to yourself or people close to you ahead of other creditors.

Ordinary trading debts stay with the company. Your suppliers and your landlord cannot come to you for them.

What should I stop doing? Stop repaying yourself or anyone connected to you. Stop selling or transferring company assets cheaply. Stop declaring dividends. Stop taking on new credit you cannot see a way to repay.

What should I do now? Start making decisions in the interests of the people the company owes, write down your reasoning as you go, and take advice before the next significant payment leaves the account.

The person to speak to is a licensed insolvency practitioner: someone regulated to advise on and run formal insolvency procedures. Our own practitioners are licensed, and the first conversation costs nothing.

Each exposure is taken in turn below, with what actually triggers it and where the detailed guidance sits.

What Directors Should Do When Insolvency Is Suspected

The protective work is unglamorous and nearly all of it is front-loaded. What happens in the weeks after a director first suspects the company cannot pay its debts shapes almost everything that follows, and it is the window we most often find has already closed.

Put Creditors’ Interests First

Normally you run the company for its owners. Once it is insolvent, or close to it, you have to start running it for the people it owes money to.

That is the biggest single change in what the law asks of a director, and nothing arrives in the post to tell you it has happened.

The switch does not flip on the first bad month. It happens when the company is actually insolvent or bordering on insolvency, or when an insolvent liquidation or administration becomes probable.

The Supreme Court settled that in the 2022 Sequana case, and the line it drew is narrower than the warnings you will read elsewhere.

In practice the question in the room changes. Not what is best for the business, but what is fair to the people it owes.

Making that shift about a company you built is genuinely hard, and most directors get there late rather than never.

If you have already taken decisions that sit on the wrong side of that line, that is usually not fatal, and it is a reason to get advice sooner rather than a reason to avoid it. Read more on directors’ duties to creditors.

Stop Decisions That Could Increase Creditor Losses

Once you know the company probably cannot recover, continuing to trade can expose you personally to the additional losses creditors suffer from that point on.

That does not mean you must down tools the moment a bad month arrives. Directors are allowed to trade through difficulty and to try to fix it.

What is not defensible is taking deposits for work that cannot be delivered, or ordering stock on credit that the company will plainly never pay for.

The line between fighting for the business and deepening the hole is genuinely hard to see from the inside.

In the cases we handle, the director who crossed it almost never noticed at the time. They were quoting for the job that was going to fix everything, taking the deposit on a Friday, and finding on the Monday that the supplier had gone to credit control.

Which argues for bringing in someone who is not standing where you are standing.

Record Board Decisions and Keep Financial Records

Every serious question a liquidator later asks comes down to what was known, and when. The records are the only answer available by then.

Write down what was decided, the information in front of you, and why. It does not have to be formal to be useful.

Two directors, a kitchen table, half a page and a date on it: that counts. We have seen notes like that do more work in an investigation than a year of properly typed minutes that nobody wrote until afterwards.

Keep filing at Companies House throughout. Late accounts are the cheapest evidence against a director there is, because the record sits there in public before anyone even opens an investigation.

One warning we give every director: do not write up minutes later to fill a gap. Reconstructed records are usually obvious, and getting caught doing it damages you far more than the missing paperwork would have.

Take Advice Before Making Payments or Selling Assets

Most of the personal exposures on this page are created by a single transaction. A payment, a transfer, a dividend. Once it has gone out, your options narrow sharply.

Advice taken before the decision protects twice over. It usually improves the decision, and the fact that it was sought is itself evidence of a director taking the duties seriously.

An initial conversation with a licensed insolvency practitioner is free and takes half an hour. Set against what a preference claim or a guarantee call costs, that is not a close call.

Most of the directors we speak to wish they had made it a month earlier. Almost none of them wish they had waited.

Can a Director Be Personally Liable for Company Debts?

Usually not. Plenty of the directors we speak to have carried months of fear about a liability that was never going to land on them.

The exceptions are real, though, and specific enough to be worth knowing precisely rather than dreading vaguely.

When Limited Liability Protects You

A limited company is a separate legal person. Its debts are its own. If it cannot pay its suppliers, its landlord or its tax, those creditors normally have no claim against you.

That holds even where the company fails badly and creditors lose a great deal of money. Business failure on its own is not misconduct, and the law does not treat it as such.

Companies fail. That is all it is.

See what limited liability means for the underlying principle.

When Personal Liability Can Arise

Personal exposure comes from a short list. A guarantee signed at some point and half forgotten. Money owed back to the company through a loan account. Dividends the company could not lawfully pay.

Then there is conduct: trading on when recovery was hopeless, paying one creditor ahead of others without good commercial reason, or moving assets out of reach.

Tax adds two more routes. Both are narrow, and both turn on how the director behaved rather than on the company simply running out of money.

Whether Your Home or Personal Assets Are at Risk

This is the question directors are most frightened to ask out loud. Often it comes near the end of a call, phrased as though it were an afterthought.

It deserves a direct answer. The house is reachable only where something connects it to a debt you personally owe.

The usual connection is a guarantee, sometimes secured directly against the property by a charge. A personal liability that goes unpaid can also end in bankruptcy proceedings, which reach your assets generally.

What does not put a home at risk is the company owing money it cannot pay.

Nobody takes your house because a limited company went under owing its suppliers. For a great many directors that is the fear keeping them awake, and it is usually the wrong one.

If your spouse co-signed something, or the business borrowing sits against a jointly owned property, their position needs looking at too. See a spouse’s liability for business debts.

Personal Guarantees

Guarantees are the most common route by which a company’s failure becomes a director’s problem, and the one directors are least prepared for.

Most are signed in a hurry, somewhere in a bundle of paperwork for a facility that was urgently needed that week, and never looked at again.

When a Personal Guarantee Can Be Enforced

A guarantee lets the lender come to you when the company defaults. Exactly when depends on the wording, and the wording is rarely what anyone remembers signing.

Some are triggered by the company entering a formal insolvency procedure. Others require the lender to pursue the company first. Some are capped at a fixed sum, others cover everything the company ever owes that lender, which is the wording that does the real damage because it grows quietly with the facility.

Read the document. Not the memory of it.

Directors come to us certain their exposure is one number, and find on reading the document that it is another. Read more on directors’ personal guarantees.

How to Check What You Have Signed

Start a single list. Every lender, every facility, the amount guaranteed, what triggers it, and whether anything is secured on property. Most directors have more than they remember.

The forgotten ones tend to be old: an equipment lease from years back, a trade account where the credit application had a guarantee clause in the small print, a lease renewal where the landlord asked for extra comfort.

Ask each lender for a copy if the file has gone missing. Lenders field that request constantly.

The alternative is finding out from a demand letter, which is how it usually reaches the directors who call us: an envelope from a lender nobody had thought about since the machine was delivered.

Guarantees are not always enforceable. Defects in how one was signed or explained can matter. See when a personal guarantee may be unenforceable.

Negotiating or Settling a Personal Guarantee

Guarantees are more negotiable than they look, and we settle them more often than directors expect. A lender facing the cost and delay of enforcing against an individual will frequently take a discounted lump sum or an instalment arrangement.

Leverage is highest before anything has been missed, and while there is still a credible picture to put in front of the lender. It falls away once judgment has been entered.

If you are reading this before signing anything, the practical protections are a cap on the amount, a time limit, and cover through personal guarantee insurance, which pays a defined percentage rather than the whole liability.

Wrongful Trading, Misfeasance and Breach of Duty

These three are the conduct claims. They are the ones that turn on judgement rather than paperwork, and the ones directors worry about most in the abstract while doing least about in practice.

Wrongful Trading

Under section 214 of the Insolvency Act 1986, a court can order you to contribute personally to the company’s assets if you kept trading after the point where there was no reasonable prospect of avoiding insolvent liquidation.

The measure is usually the extra loss creditors suffered after that point, though the court has discretion over the amount it thinks proper.

Claims are less common than the anxiety around them. Not much comfort when the anxiety is the thing you are living with, but true.

There is a defence: that every step was taken to minimise the loss to creditors once the position was clear. Written advice, recorded decisions and visible cost action are what that defence is built from.

So the dull work is the work. Nobody assembles that defence retrospectively.

See what wrongful trading means for the detail.

Misfeasance

Misfeasance is a claim under section 212 of the Insolvency Act 1986 that you misapplied or retained company money or property, or otherwise breached a duty to the company.

Liquidators use it for the everyday stuff. The company card that covered a family holiday during a bad quarter. The trailer that left the yard and never appeared on an invoice. The loan account nobody ever wrote down.

It does not require dishonesty. Careless is enough.

Which is why it catches decent people. See misfeasance claims against directors.

Breach of Directors’ Duties

The general duties in the Companies Act 2006 apply throughout: act within your powers, promote the success of the company, exercise reasonable care and skill, avoid conflicts of interest.

In distress the conflict duty gets sharp. Deciding whether the company should repay a loan it owes you, or buy assets from another business you own, puts you on both sides of the table at once.

Where that happens, declare the interest, take the decision without your vote if you can, and record it. Guidance on disclosing conflicts of interest covers the mechanics.

Preferential Payments and Transactions at Undervalue

This is where good intentions do the most damage. Almost every director we speak to has done at least one of these things, and almost none of them realised it was a problem at the time.

Paying Directors, Family Members or Connected Companies

A preference under section 239 of the Insolvency Act 1986 is a payment that puts one creditor in a better position than they would have been in on liquidation, made because you wanted that result.

A liquidator can look back six months for ordinary creditors, and two years for connected parties: family, fellow directors, other companies in the same ownership.

For connected parties the desire to prefer is presumed. That reversal matters more than the lookback period, because it puts the burden on the director to disprove something rather than on the liquidator to prove it.

Paying the supplier threatening to stop deliveries is usually defensible, because you did it under commercial pressure. Paying your brother-in-law’s invoice ahead of everyone else gets unwound.

See preferential payments during insolvency.

Repaying a Director’s Loan

A company that repays a director while insolvent has made a preference in its clearest form. The director is a creditor, the director is connected, and the director was paid when others were not.

Directors do this constantly in the final months, reasoning that it was their own money in the first place. We hear that sentence more than almost any other, and we have some sympathy with it.

It is still not a defence.

If it has already happened, say so early rather than waiting for it to surface. Repaying it voluntarily costs far less than defending a claim you are likely to lose.

Selling or Transferring Company Assets

A transaction at undervalue under section 238 of the Insolvency Act 1986 is a gift, or a sale for significantly less than the asset was worth, within two years of the onset of insolvency.

The van transferred to a spouse for a pound. The plant sold across to another company at book value when the market would have paid more. The customer list that moved without anyone putting a price on it.

None of that was done to cheat anybody. It was done at speed, by people trying to save something, which is exactly why it keeps happening.

If you need to sell assets, get an independent valuation first and sell at it. That single step turns a claim into a transaction you can explain. See transactions at undervalue.

Overdrawn Director’s Loan Accounts and Unlawful Dividends

For owner-managed companies this is the exposure that turns up most often, and it is rarely the result of anything deliberate. It builds quietly across years of drawing money the way the accountant first set it up.

What Happens to an Overdrawn Director’s Loan Account

An overdrawn loan account means you owe the company money. On liquidation it becomes an asset the liquidator is expected to collect, and they will pursue you for it personally.

There is a tax cost on top while the company is still trading. A charge of 33.75% of the outstanding balance falls due if the loan is still unpaid nine months and one day after the year end. The company gets it back once you repay the loan.

The pattern we see is always the same. Modest monthly drawings against the account, on the understanding that a dividend at the year end will clear it. Then the profit does not arrive.

What was a bookkeeping arrangement is now a personal debt, and usually the largest single exposure on the page. See overdrawn directors’ loan accounts.

When Dividends May Have to Be Repaid

A dividend is only lawful if the company has enough distributable profit to cover it, tested against proper accounts at the moment it is declared. Not against what the year is expected to produce.

Where there were no distributable profits, the dividend is unlawful and can be recovered, particularly from a shareholder who knew or ought to have known the position.

In an owner-managed company the director and the shareholder are the same person. That test is rarely difficult to meet.

The trap here is timing rather than intent. Dividends declared through a year that ends in a loss are unlawful even though nothing about them felt wrong when you took them.

How a Liquidator Can Recover the Money

They will ask for the loan account balance, then for repayment. Where it cannot be paid in full a liquidator will usually consider an instalment arrangement, and will take security or bankruptcy proceedings against a director who does not engage at all.

Engagement is most of the battle.

Writing the balance off before liquidation is not the escape it appears to be. It creates a tax charge and a liquidator can challenge the write-off itself. See writing off a director’s loan account.

Engage early and the outcome is usually an affordable arrangement over a period the household can actually absorb.

Ignore the letters and it escalates faster than almost any other claim on this page. Leaving the envelope on the side is what makes it expensive.

HMRC Personal Liability Notices

Unpaid tax does not by itself become a director’s debt. Two specific routes can move it across, and both depend on conduct rather than on the company simply running out of money.

PAYE and National Insurance Liability

A Personal Liability Notice is a notice HMRC issues under section 121C of the Social Security Administration Act 1992, transferring unpaid National Insurance from the company to a named officer.

The test is whether the failure to pay was attributable to your fraud or neglect. Neglect is the part directors underestimate: it does not require dishonesty, only a failure to take reasonable care.

These notices are not common, and they are aimed at cases where National Insurance was deducted from wages and used elsewhere while the company kept trading.

We say that plainly because the fear of one does more damage than the notices themselves. Falling behind on tax because the money genuinely was not there is not the same thing as neglect.

VAT and Repeated Company Insolvencies

HMRC can also issue a joint and several liability notice, introduced by the Finance Act 2020, which makes a director personally responsible for company tax including VAT in defined circumstances.

The main triggers are tax avoidance or evasion, and a pattern of repeated insolvencies where tax goes unpaid each time and a similar business carries on afterwards.

One failed company will not put you here. This is aimed at directors on their third or fourth, which is worth knowing if you are weighing up a successor business.

What to Do If HMRC Issues a Notice

Find the appeal deadline on the letter before reading anything else on it.

These deadlines are short, and a missed one is far harder to fix than the appeal itself would have been.

Then get the evidence together: what the company could actually pay at the time, what you did about it, and whether you tried to agree a Time to Pay arrangement, which is an instalment plan agreed with HMRC.

The cases that defend well are the ones where tax was treated as a real priority and there is a paper trail to prove it.

Take specialist advice. This is not correspondence to answer on your own on a Sunday night.

What Happens During a Liquidator’s Investigation?

Every liquidation involves an investigation into how the company was run. It happens whether or not anyone suspects anything of anybody.

Hold onto that when the first letter lands, because it does not read like a routine document. Most of the directors we act for assume it is an accusation. It is not.

What Records the Liquidator Will Request

Accounts and bank statements, the sales and purchase ledgers, payroll and tax records, board minutes, and the loan account history. Usually covering the two or three years before appointment.

You are legally required to hand company records over and to cooperate. Refusing, or losing things conveniently, is itself misconduct and it changes how everything else you say is read.

Where records are genuinely incomplete, say so plainly and explain why. A gap you declare is survivable. The same gap, found by someone else, is not.

See a liquidator’s powers and duties.

How Director Conduct Is Reported

The liquidator must report on the conduct of everyone who was a director in the three years before insolvency, and send that report to the Insolvency Service within three months of appointment.

You do not see the report and you are not asked to comment on it first. The Insolvency Service then decides whether to investigate further.

Most reports lead nowhere at all. They exist so the small proportion of cases that need attention get it, and the great majority of directors never hear another word about it.

See insolvent company investigations.

How to Respond to Questions or Claims

Answer promptly and in writing, and keep to what is actually remembered. Directors get into trouble by guessing at dates and figures to sound helpful, then correcting themselves later.

Being wrong twice reads far worse than not knowing once.

If a claim is put, take your own advice rather than negotiating directly.

The liquidator acts for the creditors. However reasonable and sympathetic the conversation feels, and it often is both, that is who is on the other side of it.

Where you know something looks bad, raise it yourself with an explanation attached. It lands very differently that way round.

Director Disqualification

Disqualification is the consequence directors fear most and meet least. It reaches a small minority of insolvencies, and in our experience the conduct behind those cases is fairly predictable.

Conduct That Can Lead to Disqualification

The Company Directors Disqualification Act 1986 allows action where a director’s conduct makes them unfit to be involved in running a company.

In practice the recurring themes are unpaid tax while other creditors were paid, trading on well past the point of hopelessness, records that were never kept, and money taken out of a company that could not afford it.

Notice how ordinary most of that is. None of it requires fraud.

That is exactly why the unglamorous record-keeping earlier on this page matters more than it sounds like it should, and it is the point we find hardest to persuade directors of while there is still time to act on it.

How Long Disqualification Can Last

Between two and fifteen years. The upper end is reserved for serious dishonesty; most cases sit in the lower bracket.

Many are resolved by an undertaking, which is a voluntary agreement to the same effect as a court order without the proceedings. It is often the sensible route where the conduct is admitted.

A compensation order can also follow, requiring you to pay creditors for losses your conduct caused. See directors’ disqualification.

Whether You Can Continue Running a Business

A disqualified person cannot be a director or take part in the management of a company, directly or through someone else acting on their instructions. Breaching that is a criminal offence.

Employment is generally still open, and so is trading as a sole trader, though the practical difficulties are real. It is also possible to apply to the court for permission to act despite the disqualification.

Read more on the risk of being disqualified as a director.

Starting a New Company After Insolvency

You are generally free to be a director again, and starting over after a failure is normal rather than suspect. There are two rules that catch people out, and both are easy to breach by accident.

Reusing the Same or a Similar Company Name

Section 216 of the Insolvency Act 1986 stops a director of a liquidated company using the same or a similar name for a new business for five years. It covers trading names, not just registered ones.

Breach is a criminal offence, and it makes you personally liable for the new company’s debts during the period you were in breach. That second part is the one that ruins people.

There are exceptions, including buying the business from the liquidator with proper notice given, and court permission. Each has to be followed exactly.

Deciding for yourself that a name is different enough is not one of them. We have seen that judgement made in good faith, by directors who had no intention of hiding anything, and it is an expensive way to be wrong.

Buying Assets from the Insolvent Company

You can buy assets back from the liquidator, and it is often the outcome that returns most to creditors. Someone who knows the business is frequently the best buyer for it.

What matters is that the sale is at a proper value, negotiated with the office holder, and documented. Independent valuation evidence is what makes it defensible afterwards.

Handled properly this is legitimate. Handled informally, by moving assets across before anyone is appointed, it becomes a transaction at undervalue and possibly worse. See phoenix companies.

Acting as a Director Again

Unless you are disqualified or bankrupt, nothing stops you. A previous insolvency is no bar to forming a new company the following week.

What follows you is practical rather than legal: lenders and suppliers will see the history, and personal guarantees are more likely to be asked for next time.

Repeated failures with unpaid tax are also what the joint and several liability rules are built for. One failure is a business event. A pattern is treated differently.

What to Do Based on Your Situation

The right next step depends on how far along this has gone. Find yourself below.

The Company Is Struggling but Still Trading

You have the most options and the cheapest protection available to you right now, which is precisely why this is the stage most directors skip.

List the guarantees. Get the loan account balance in front of you. Start writing decisions down as they happen, not afterwards. Stop declaring dividends until someone has confirmed there is distributable profit to cover them.

None of that costs anything.

Then get an honest read on whether the company is viable.

That answer changes everything downstream, and it is very hard to reach from inside the business, where every month still feels like it might be the one that turns.

Formal Insolvency Is Likely

Stop paying anyone connected to you. Stop moving assets. Keep tax and payroll records straight, and take advice before any further significant payment leaves the account.

Expect guarantees to be called at or soon after the appointment. Knowing which ones and for how much is worth more to you now than it will be later.

Choosing the procedure is a separate question from managing personal exposure, and the exposure should shape the choice. Most directors decide it in the opposite order.

A Liquidator or the Insolvency Service Has Contacted You

Reply within the deadline given. Hand over what is asked for.

And do not create documents that did not exist at the time, however tempting the gap looks.

Take advice before answering anything that touches a possible claim. Early answers tend to set the shape of everything afterwards.

See what happens to directors in liquidation for what the process looks like from here.

Get Advice About Your Personal Exposure

Most directors who call us have been carrying this alone for months, rehearsing worst cases at four in the morning. The actual exposure is usually smaller than the fear, and more fixable when there is still time to act.

In one conversation we can work out which of the risks on this page actually apply, what is already fixed and cannot be undone, and what there is still time to change.

That last category is usually the biggest of the three.

Call us free on 0800 074 6757, or use the live chat on this page. It is confidential, there is no charge for the initial conversation, and you do not need your paperwork in order to have it.

Frequently Asked Questions

Related Guides

• Directors’ personal guarantees and when a guarantee may be unenforceable
• Wrongful trading and misfeasance claims
• Directors’ duties to creditors
• Preferential payments and transactions at undervalue
• Overdrawn directors’ loan accounts
• HMRC personal liability notices
• Directors’ disqualification
• Phoenix companies
• What happens to directors in liquidation