With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
Cash will be gone soon, or a statutory demand has just landed. At this point, UK law expects directors to stop focusing on shareholder returns and start prioritising creditors’ interests. Every decision from now on may later be reviewed if the company enters formal insolvency. Delay or missteps can expose directors to wrongful trading claims under the Insolvency Act 1986.
The good news is that a clear, structured response helps protect creditors, employees, and your own position. The checklist below walks through the practical steps directors should take immediately when insolvency becomes likely.
Why the Period Before Insolvency Is Critical for UK Directors
When a company becomes insolvent or is likely to become insolvent, directors’ duties shift toward protecting creditors. This principle comes from Companies Act 2006 section 172(3) and is reinforced in insolvency law and official guidance for directors.
Courts and insolvency practitioners will later examine whether directors took every reasonable step to minimise losses to creditors once insolvency was likely. Continuing to trade without a realistic rescue plan, favouring certain creditors, or disposing of assets improperly may lead to personal liability under Insolvency Act 1986 section 214 (wrongful trading).
Two key legal tests are used to determine insolvency:
Cash-flow test – the company cannot pay debts as they fall due.
Balance-sheet test – the company’s liabilities exceed its assets, including contingent liabilities.
If either test is met, directors should immediately begin acting in creditors’ best interests and seek professional advice.
Courts typically examine evidence such as:
Board minutes and financial forecasts
Payment records and creditor communications
Professional advice obtained during the period before insolvency
Prompt action and proper documentation demonstrate that directors acted responsibly.
Companies Act 2006, section 172(3) (duty where insolvency is likely)
Company Directors Disqualification Act 1986 (director conduct)
Immediate Red Flags That Suggest Insolvency May Be Approaching
Spotting warning signs early gives directors time to protect creditors and explore rescue options. None of the signs below automatically proves insolvency, but they indicate the need for urgent review and professional advice.
Diagnostic checklist – consider whether any apply:
The bank has withdrawn overdraft facilities or called in a loan.
Key suppliers now require payment up front.
A statutory demand is particularly serious. If the debt is £750 or more and remains unpaid for 21 days, the creditor may present a winding-up petition to the court.
At this stage, directors should assume insolvency may be approaching and begin taking steps to protect creditors while assessing rescue options.
Personal Liability Risks Directors Must Manage
Once insolvency becomes likely, directors must avoid actions that worsen creditors’ losses.
Common legal risks include:
Wrongful trading – continuing to trade when there was no reasonable prospect of avoiding insolvent liquidation. Courts may order directors to contribute personally to company debts.
Fraudulent trading – carrying on business with intent to defraud creditors. This can lead to civil and criminal consequences.
Preferences – paying one creditor ahead of others in a way that places them in a better position during insolvency.
Directors may also face disqualification from acting as a director for between two and fifteen years if their conduct is found to be unfit.
Personal guarantees operate separately from company debts. If a director has personally guaranteed borrowing, the lender may pursue them directly if the company defaults.
Action Plan at a Glance
When insolvency becomes likely, directors should act quickly but methodically. The outline below groups the key steps into practical phases to help directors manage the situation responsibly and gather the information required by an insolvency practitioner.
Phase
Key actions
Immediate
Review cash position, pause non-essential spending, hold a board meeting, begin documenting decisions
Early assessment
Prepare short-term cash-flow forecasts and seek professional advice
Compile asset lists and ensure assets are safeguarded
Employee planning
Review payroll, employment obligations and possible redundancies
Creditor communication
Maintain factual communication with key creditors
Formal decision
If rescue is not possible, prepare for a formal insolvency procedure
The sections below explain each stage in more detail.
Immediate Steps: Pause Non-Essential Spending and Secure Records
The first priority is preserving remaining funds and ensuring accurate records exist.
Directors should:
Pause discretionary spending such as marketing campaigns or non-essential travel.
Avoid taking on new credit unless there is a realistic plan to repay it.
Ensure accounting records are up to date and securely backed up.
Hold an urgent board meeting to document the financial position and next steps.
Accurate records are essential. Insolvency practitioners must review the company’s financial history, and poor record-keeping can lead to further scrutiny of director conduct.
Seek Advice from a Licensed Insolvency Practitioner
Directors should obtain professional advice as soon as insolvency appears possible.
A licensed insolvency practitioner (IP) can help directors:
Assess whether the company is insolvent
Review available rescue procedures
Explain directors’ duties and risks
Prepare for a formal insolvency procedure if necessary
Early advice helps directors make informed decisions and demonstrate they acted responsibly once financial distress became apparent.
Consider Rescue Options
If the business remains viable, several formal restructuring procedures may be available.
Common options include:
Moratorium – introduced under the Corporate Insolvency and Governance Act 2020, this gives eligible companies temporary protection from creditor enforcement while a rescue plan is developed. Directors remain in control during the moratorium under the supervision of a monitor.
Company Voluntary Arrangement (CVA) – a formal agreement allowing a company to repay debts over time while continuing to trade. Approval requires at least 75% of voting creditors (by value) and must also pass additional voting safeguards involving unconnected creditors.
Administration – a licensed administrator takes control of the company to rescue the business, achieve a better outcome for creditors than liquidation, or realise assets for creditors.
If rescue is not possible, directors may choose Creditors’ Voluntary Liquidation (CVL) to close the company in an orderly way.
Protect Company Assets
Once insolvency becomes likely, directors must protect company assets for the benefit of creditors.
Practical steps include:
Preparing a detailed asset register
Ensuring stock, equipment and records are secure
Avoiding sales to connected parties without proper valuation
Recording all transactions clearly
Selling assets cheaply or favouring particular buyers can later be challenged as a transaction at undervalue or preference.
Plan for Employees and Payroll Obligations
Employees have certain preferential claims in insolvency.
Amounts owed to employees such as:
wage arrears (subject to statutory limits)
holiday pay
are treated as preferential debts in liquidation.
If the company cannot pay these amounts, employees may claim certain entitlements through the Redundancy Payments Service from the National Insurance Fund.
Employees may claim:
redundancy pay
unpaid wages
holiday pay
statutory notice pay (subject to statutory limits)
Directors should gather payroll records and employment contracts so the insolvency practitioner can process claims efficiently.
Maintain Careful Communication with Creditors
Directors should keep communication factual and measured when dealing with creditors.
Good practice includes:
Informing key creditors that professional advice is being taken
Avoiding promises of payment that cannot realistically be met
Ensuring creditors are treated fairly and consistently
Making selective payments to particular creditors may later be challenged as a preference.
Formalise the Decision and Enter the Appropriate Procedure
If rescue is not possible, directors must decide how the company will enter insolvency.
This usually involves:
A board meeting documenting the company’s financial position
Shareholder approval where required by company law
Appointment of an insolvency practitioner as liquidator or administrator
The insolvency practitioner will then take responsibility for administering the insolvency process and reporting on director conduct.
Common Mistakes Directors Regret Later
Decisions made shortly before insolvency are often examined closely. Common errors include:
Continuing to trade without updated financial forecasts
Paying connected parties ahead of other creditors
Selling company assets below market value
Poor record-keeping or missing accounts
Ignoring HMRC correspondence
Delaying professional advice until the company has no remaining funds
Directors who take professional advice early and document their decisions clearly are generally in a much stronger position.
Quick Reference – Core UK Director Duties When Insolvency Is Likely
When insolvency becomes likely, directors should focus on:
acting in creditors’ best interests
minimising further losses to creditors
preserving company assets
treating creditors fairly
maintaining proper accounting records
seeking professional advice promptly
Simplified duty shift:
Solvent company (focus on shareholders) ↓ Financial distress appears ↓ Insolvency likely – duty increasingly focuses on creditors ↓ Formal insolvency procedure begins
FAQs
Can I keep trading while the company is insolvent?
Possibly. Trading may continue if there is a realistic prospect of avoiding insolvent liquidation and directors take steps to minimise losses to creditors. However, continuing to trade without a viable rescue plan can lead to wrongful trading claims.
What happens to a Bounce Back Loan if the company liquidates?
Bounce Back Loans are company debts. The lender can claim under the government guarantee if the company cannot repay the loan, but the company remains liable for the debt through the insolvency process. Directors are not required to give personal guarantees for these loans, although misuse of funds may still be investigated.
Will I automatically be disqualified as a director?
No. The Insolvency Service reviews the conduct of directors after insolvency. Disqualification only occurs if conduct is considered unfit, with bans ranging from two to fifteen years.
Do I have to tell employees immediately?
Directors must inform and consult employees if redundancies become likely. Employment law requires consultation periods depending on the number of employees affected.
Can I pay my salary if the company is insolvent?
Directors may receive salary if it is contractually due and consistent with normal payroll practices. However, excessive or unusual payments may be scrutinised during insolvency.
What records will the insolvency practitioner review?
Expect the insolvency practitioner to examine:
accounting records and ledgers
bank statements
tax filings
asset registers
contracts and invoices
board minutes and major transaction records
Maintaining complete records helps demonstrate responsible conduct.
How are personal guarantees enforced?
If a director has personally guaranteed borrowing, the lender can pursue the guarantor directly once the company defaults. Enforcement may include legal action or bankruptcy proceedings if the debt remains unpaid.
Should I sell assets to raise cash before insolvency?
Asset sales must be carefully considered. Selling assets below market value or to connected parties may be reversed during insolvency proceedings. Independent valuation and proper documentation are essential.
Is a Company Voluntary Arrangement quicker than liquidation?
A CVA typically takes several weeks to propose and approve because creditors must vote on the arrangement. A voluntary liquidation can often begin more quickly once the necessary corporate approvals are obtained.
How long does it take to enter voluntary liquidation?
The timing varies depending on company governance and preparation of documentation. Once directors and shareholders approve the decision and a liquidator is appointed, the liquidation formally begins.
Will suppliers find out immediately?
Creditors are formally notified once an insolvency practitioner is appointed. However, suppliers may become aware earlier if payments stop or trading changes.
Does HMRC have special status in insolvency?
For certain taxes such as VAT and PAYE, HMRC acts as a secondary preferential creditor in insolvency. This means those debts rank ahead of most unsecured creditors but behind certain employee claims.
Can I start another company after liquidation?
Yes, unless you are disqualified or subject to restrictions. However, Insolvency Act 1986 section 216 restricts directors from using the same or a similar company name after liquidation unless specific conditions are met.
What fees will the insolvency practitioner charge?
Insolvency practitioner fees are approved by creditors and may be calculated as:
a fixed fee
time costs
a percentage of realised assets
Details must be disclosed to creditors during the insolvency process.
Where can I obtain professional advice?
Directors should seek advice from a licensed insolvency practitioner or qualified legal professional experienced in insolvency law. Early advice can help identify rescue options and ensure directors comply with their legal duties.
Your Next Step – Seek Professional Advice
If your company may be insolvent, acting early is essential. Professional advice can clarify whether rescue is possible or whether a formal insolvency procedure should begin.
Directors who seek advice promptly, maintain proper records and treat creditors fairly are far better protected if the company later enters insolvency.
This guide provides general information about UK insolvency law and should not be relied upon as legal advice.
