Understanding Directors’ Duties in Insolvency: What You Must Do When the Business Is in Trouble

As a licensed insolvency practitioner, one of the most common conversations I have with directors centres around their legal duties when a company enters financial distress. Many assume their responsibilities remain the same as during profitable trading – but the reality is very different.

In this blog, I’ll explain what changes when insolvency threatens, what practical steps you should take, and how to protect yourself while doing the right thing for creditors and stakeholders.

When Do Directors’ Duties Shift?

Under normal circumstances, directors’ primary duty is to promote the success of the company for the benefit of its shareholders.

However, the moment the business becomes insolvent – or is likely to become insolvent – that duty pivots. At this point, the law requires directors to prioritise the interests of the company’s creditors.

This shift is well established in case law and statute, including the Insolvency Act 1986 and leading judgments available on BAILII (https://www.bailii.org).

Put simply:

👉 When solvency is doubtful, creditors’ interests move to the centre of the decision‑making process.

Key Duties Directors Must Observe

Below is a clear, practical breakdown of what directors must – and must not – do when insolvency is on the horizon:

1. Consider the interests of creditors first

Decisions should be made with the aim of minimising losses to creditors. When discussing strategy in board meetings, document how creditor interests were considered.

2. Avoid wrongful trading

Once you know, or ought to know, that there is no reasonable prospect of avoiding insolvent liquidation or administration, you must not continue trading in a way that worsens creditors’ positions.

More detail:

• Insolvency Service – Director Responsibilities: https://www.gov.uk/government/organisations/insolvency-service

• Insolvency Act guidance on gov.uk: https://www.gov.uk/government/collections/insolvency-service-guidance-publications

3. Maintain proper financial records

You must be able to demonstrate that decisions were informed, reasonable and supported by accurate information. Poor record‑keeping is one of the most common criticisms raised by liquidators.

Further reading:

• Companies House record‑keeping rules: https://www.gov.uk/running-a-limited-company/company-and-accounting-records

4. Avoid preferences and transactions at undervalue

This includes repaying directors’ loans, paying connected creditors ahead of others, or transferring company assets for less than full value. These transactions can later be reversed by an office‑holder.

5. Seek early professional advice

Courts often look favourably on directors who took independent insolvency advice early. It shows awareness, responsibility and a proactive approach.

6. Hold regular, structured board meetings

Discuss cash‑flow forecasts, risks, options, and decision‑making rationale. Minutes will become essential evidence if your conduct is reviewed in future.

Practical Tips for Directors in Financial Distress

Here are simple, proven steps I always recommend:

✔ Get your financial information up to date

Accurate cash‑flow forecasting is essential. If your internal systems are weak, seek help from your accountant immediately.

✔ Pause major commitments

Avoid signing long‑term contracts, taking out finance, or placing large orders unless you are confident the business can meet those obligations.

✔ Understand your personal exposure

This includes personal guarantees, overdrawn director loan accounts and unpaid taxes. HMRC guidance is available at: https://www.gov.uk/government/organisations/hm-revenue-customs

✔ Keep HMRC and key creditors informed

Open communication demonstrates responsible conduct and may provide additional time or flexibility.

✔ Review options early

A company in distress may have more options than you think:

• Time to Pay arrangement with HMRC

• Company Voluntary Arrangement (CVA)

• Restructuring Plan

• Administration

• Creditors’ Voluntary Liquidation (CVL)

Each has different implications – early analysis is crucial.

✔ Document everything

Minutes, forecasts, advice received, decisions made, and reasons behind them should all be carefully recorded.

Takeaway Checklist

Before you take your next steps, use this simple checklist:

• Have we assessed solvency using latest accounts and forecasts?

• Are creditor interests being documented in our decisions?

• Have we stopped taking on new liabilities we may not be able to meet?

• Are we avoiding preferential payments and undervalue transactions?

• Have we sought early advice from a licensed insolvency practitioner?

• Are board meetings frequent, structured and properly minuted?

• Are financial records complete, accurate and up to date?

• Have we considered all restructuring and rescue options?

• Is HMRC being kept informed of tax arrears or payment issues?

• Is there clarity around directors’ personal liabilities?

Final Thoughts

When a company faces insolvency, the way directors conduct themselves can significantly influence outcomes – for creditors, for the business, and for their own personal position.

The directors who fare best are those who:

✔ acknowledge challenges early
✔ act responsibly and transparently
✔ seek advice before it’s too late
✔ make decisions based on evidence rather than hope