One of the biggest missed opportunities for directors of struggling businesses is spotting the early warning signs of insolvency. and then taking decisive, well‑documented steps before things escalate. This week, I want to share how you can recognise those signals, respond appropriately and protect both the business and your personal position.
Why Early Signs Matter
When a company drifts into distress, the board’s obligations shift. As soon as the business becomes insolvent or is likely to become so, directors’ duties extend beyond simply promoting success for shareholders – they must have regard to the interests of creditors too.
If warning signs are ignored, what starts as difficult trading can quickly become a scenario of personal liability (for example under the wrongful trading provisions of the Insolvency Act 1986) or potentially fraudulent or misfeasance claims.
In short: the sooner you recognise there may be a problem – and the sooner you act – the better your options, the stronger your position and the lower your risk.
Typical Early Warning Signs
From working with many companies entering crisis mode, here are the key red flags I commonly observe:
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Consistent or mounting operating losses and cash‑flow deficits, particularly when no viable turnaround plan is in place.
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Payment delays or defaults to key suppliers, HMRC or other creditors (especially while continuing to incur new liabilities).
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Director loan accounts or other related‑party transactions that favour connected parties ahead of general creditors.
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Significant creditor pressure: e.g., supplier demands, threat of enforcement, HMRC notices of assessment or joint & several liability.
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Management information (accounts, forecasts, budgets) that is out of date, incomplete or overly optimistic without supporting detail.
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Board and management discussions that assume ‘we’ll just trade our way out’ rather than testing whether realistically you can trade out.
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Failure to keep proper records, poor governance, or inadequate oversight of performance and financial position.
If you recognise one or more of these in your business, it’s time to act – not wait.
Practical Steps You Should Take Now
Here’s what I recommend clients do when they begin to see signs of distress:
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Hold an honest board discussion
Bring together the directors and senior management: where is the business now, where are we heading, what happens in the downside scenario? Record the discussion in board minutes. -
Refresh the financial picture and run stress‑tests
Update management accounts, cash‑flow forecasts, and run scenarios: (a) business as usual; (b) moderate downside; (c) severe downside. Be realistic rather than optimistic. -
Review contracts & new commitments
Before you commit to any further liabilities (new orders, purchases, hires, expansions), ask: do we know we can fulfil this? What’s the downside if we don’t? If you’re unsure, pause. -
Document decisions and rationales
Good records matter. Document board decisions, dissenting views, rationale for continuing or changing course – this strengthens your position later if a claim is made. -
Engage expert advice early
Don’t wait until the situation becomes acute. An insolvency‑specialist adviser or IP consulted early – especially one with tools like I have (VAi and the 6 Lens Review – sure I know that at the time I’m writing this I’m the only IP in the UK with such tools, but this post will still be appearing here and surely others must follow my lead?) – may help preserve options (e.g., restructuring, CVA, creditor negotiation) rather than being forced into liquidation. -
Monitor and avoid suspect payments/transactions
Avoid favouring connected parties over other creditors, transferring assets at undervalue, or continuing to incur unreasonable liabilities. These can trigger personal liability for directors. -
Prepare for contingency
Even if you continue trading, prepare for what happens if you cannot: ensure the company’s records are up to date, cash position clearly understood, key stakeholders (tax, major suppliers, funders) informed appropriately.
Why This Matters - and What Happens If You Don’t?
From a practical viewpoint, ignoring or mismanaging early distress means you may miss the chance to restructure or negotiate and instead end up in formal insolvency – with far fewer options and greater risk.
From a legal/regulatory perspective: directors may face claims for wrongful trading (s 214 IA 1986) if they continue to trade when they should not. They may also face claims for misfeasance, transactions at undervalue or fraudulent trading (s 213 IA 1986), or be banned as a director, if the conduct is flawed. And regulatory bodies such as Insolvency Service and HM Revenue & Customs monitor for misuse/abuse of insolvency processes.
Effectively, taking prompt and sensible action now enhances your options and limits personal, board‑level risk.
Takeaway Checklist
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Convene a board meeting: review current financial position and worst‑case scenario
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Update management accounts and cash‑flow forecast; run stress‑tests
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Review all new contracts and commitments: do we know we can deliver?
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Document deliberations, decision‑making and rationale in writing
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Engage insolvency‑specialist advice early (IP or advisory)
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Monitor and avoid preferential payments, connected‐party transactions or asset transfers at undervalue
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Ensure key records (accounts, cashflows, creditor lists, tax exposures) are up to date
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Develop a contingency plan for “if we cannot trade on”: know exit options and next steps
I hope you find this framework helpful. If you recognise one or more of these warning signs in your business now, please treat this as your prompt to act sooner rather than later. With timely decision‑making and clear documentation, you preserve options for the business and reduce personal risk for directors.