Common Insolvency Myths Debunked

Most of what directors believe about insolvency is wrong. The myths are not harmless. They delay decisions, increase personal liability, and lead directors into exactly the situations the Insolvency Act was designed to prevent.

We hear these myths in almost every first consultation. A director who believes liquidation means losing their house will avoid seeking advice until a creditor forces the issue.

A director who believes dissolving an insolvent company is a clean exit creates personal liability that follows them for years. A director who confuses wrongful trading with criminal prosecution panics when they should be planning.

Every myth on this page costs directors money, time, and options. We debunk each one with the law and the practical reality, drawing on the consultations we run every week.

Insolvency Myth 1: Liquidation Means Losing Your House

Reality: Your house is only at risk in three situations; if you gave a personal guarantee secured against it, if a court makes a wrongful trading contribution order you cannot pay from other assets, or if you are made personally bankrupt as a result.

A limited company’s debts are the company’s debts. Limited liability means exactly what it says. We see directors delay liquidation for months because they believe their family home is automatically at risk. In most cases, it is not. Where it is, the risk comes from guarantees the director signed, not from the liquidation itself.

We tell every director who raises this to check the guarantee position first. If you did not guarantee the debt against your property, your house is not at risk from the company’s insolvency. If you did, you need personal legal advice, which is a separate conversation from company insolvency advice. See our guide on what happens to directors in liquidation.

Insolvency Myth 2: You Can Dissolve the Company and Walk Away

Reality: Dissolution removes the company from the register. It does not extinguish the debts. Creditors can apply to restore the company within six years and pursue their claims. HMRC can object to the strike-off application and block it.

Dissolving an insolvent company to avoid the cost of liquidation does not save money. It creates a deferred liability with compound interest and a creditor who is now angry as well as unpaid.

We have sat with directors who dissolved their company three years ago and received a restoration application from HMRC. The legal costs of defending the restoration exceeded what a CVL would have cost in the first place. The £13 strike-off fee was the most expensive saving they ever made.

Insolvency Myth 3: Wrongful Trading Means Prison

Reality: Wrongful trading under section 214 of the Insolvency Act is a civil claim. You can be ordered to contribute personally to the company’s assets; you cannot be imprisoned. Criminal liability requires fraudulent trading under section 213; carrying on business with intent to defraud creditors. That is a different offence with a much higher evidential threshold.

We make this distinction clearly because the confusion between wrongful trading and fraudulent trading causes unnecessary panic. Most directors who face personal consequences face civil claims and disqualification, not criminal prosecution.

Criminal cases involve deliberate dishonesty, not poor business judgement. If a director traded too long through optimism rather than fraud, the exposure is financial, not criminal.

Insolvency Myth 4: The Liquidator Works for the Director

Reality: The liquidator works for the creditors. In a CVL, you nominate the liquidator, but once appointed, their duty runs to the creditor body, not to you.

In a compulsory liquidation, the Official Receiver is appointed by the court and has a statutory duty to investigate director conduct. The liquidator is not your adviser, your advocate, or your ally. They are an officer whose job is to maximise creditor recoveries and report on whether your conduct was fit.

We see directors who assume the IP they appointed will look out for their interests. The IP will be professional and fair, but their loyalty is to the creditors. If you need someone looking out for your personal interests, you need a solicitor.

Insolvency Myth 5: Resigning as Director Avoids the Investigation

Reality: Resignation does not remove liability for decisions made while you were in office. The liquidator investigates every person who was a director during the relevant period, whether they are still on the board or not.

The Insolvency Service can seek disqualification against former directors. Your personal guarantees survive resignation. Your overdrawn loan account survives resignation. The only thing resignation ends is your authority to act; not your accountability for what you already did.

Insolvency Myth 6: HMRC Is Just Another Unsecured Creditor

Reality: Since December 2020, HMRC has secondary preferential creditor status for PAYE, employee NICs, VAT, CIS deductions, and student loan repayments. These taxes; the ones you collected on behalf of HMRC; rank ahead of floating charge holders and all unsecured creditors.

Corporation Tax and employer NICs remain unsecured, but the preferential portion can be substantial. We see directors who treated HMRC as a low-priority creditor discover during liquidation that HMRC’s preferential claim consumed most of the available assets. See creditor priority in liquidation.

Insolvency Myth 7: Stopping Trading Replaces a Formal Process

Reality: Simply stopping trading without a formal insolvency process does not end the company’s obligations. Creditors can still pursue their claims. HMRC can still petition to wind up the company. The Insolvency Service can still investigate director conduct.

Doing nothing is the worst option because it leaves the company in a legal limbo where debts accumulate, creditors escalate, and director conduct during the drift period is examined in any subsequent investigation.

A CVL typically costs from £5,000, paid from the company’s assets. If the company has no assets, some IPs will still accept the appointment. If you genuinely cannot fund a CVL, a creditor may petition for compulsory liquidation, which costs you nothing directly but removes all your control. Either way, a formal process is better than no process.

Insolvency Myth 8: A Failed Company Bars You From Future Directorships

Reality: Being a director of a company that enters insolvency does not automatically disqualify you. Disqualification is a separate process that depends on your conduct, not on the insolvency itself.

If you acted responsibly; sought advice, kept records, cooperated with the liquidator; there is no reason you cannot be a director of another company. Disqualification only follows if the Insolvency Service concludes your conduct was unfit and obtains an order or undertaking.

We have helped directors close one company through a CVL on a Tuesday and incorporate a new company on a Wednesday. The key is that the new company must not trade under a prohibited name (section 216), and the director must not be subject to a disqualification order.

The One Truth That Replaces All the Myths

Every myth on this page has the same root cause: directors who did not seek professional advice early enough. Take one thing from this page; a single conversation with a licensed insolvency practitioner will replace every myth with the specific legal reality that applies to your company.

The conversation is free, confidential, and almost always less frightening than whatever the director has been imagining at 2am.

Company Debt’s regulated insolvency practitioners deal with these myths every day. Make the call. The truth is almost always more manageable than the fear.

FAQs About Common Insolvency Myths