Avoiding Personal Liability as a Director: What You MUST Get Right When Insolvency Looms

by | Nov 18, 2025 | Advice to Directors

When a company enters financial distress, one of the first concerns directors raise with me is:

‘Could I be held personally liable?’

It’s a fair question – and one that’s often misunderstood.

The good news? With the right steps, careful documentation and early action, directors can usually protect themselves while doing the right thing for the company and its creditors.

This blog breaks down exactly what personal liability looks like in an insolvency context, the key risks to avoid, and the practical steps every director should take.

What Does Personal Liability Actually Mean?

Directors are generally protected by the limited liability structure – but that protection can be removed in certain circumstances.

Personal liability does not happen automatically when a company fails. It arises only when directors:

  • allow the company to trade wrongfully

  • prefer themselves or connected parties

  • dispose of assets improperly

  • fail to keep proper records

  • continue to trade when losses to creditors could reasonably have been minimised

Relevant legislation includes the Insolvency Act 1986, with primary materials available via BAILII:
https://www.bailii.org

Guidance is also available from the Insolvency Service:
https://www.gov.uk/government/organisations/insolvency-service

The Key Risks Directors Must Be Aware Of

1. Wrongful Trading (s.214 IA 1986)

This applies when directors knew, or ought to have known, that insolvent liquidation or administration was unavoidable – but continued trading anyway.

If found liable, directors can be required to contribute personally to the company’s assets.

2. Fraudulent Trading (s.213 IA 1986)

This is far more serious and involves trading with intent to defraud creditors. It’s rare, but when proven, personal liability (and potential criminal sanctions) follow.

3. Preferences & Transactions at Undervalue

Paying one creditor ahead of others (especially directors or connected parties), or selling assets cheaply, can be reversed and lead to personal exposure.
More information: https://www.gov.uk/insolvency-service-guidance-publications

4. Misfeasance

Directors can be personally liable for misapplying company funds, breaching fiduciary duties or acting outside their authority.

5. Poor Record‑Keeping

Failing to keep adequate accounting records – or failing to evidence decisions – can be used as the basis for personal liability claims.
Companies House guidance:
https://www.gov.uk/running-a-limited-company/company-and-accounting-records

6. Personal Guarantees

Not technically insolvency-related, but still a major source of director liability. If signed, they will almost certainly be pursued.

How Directors Can Protect Themselves

I frequently tell directors that personal protection isn’t about clever legal manoeuvres – it’s about good governance, early awareness and clear documentation.

Here are the practical steps I recommend:

✔ 1. Get clear, accurate financial information

If you don’t have up-to-date management accounts or cash-flow forecasts, you are effectively steering blind.

✔ 2. Hold frequent, structured board meetings

Record decisions, advice taken and how creditor interests were considered.

✔ 3. Seek professional advice early

Courts look favourably on directors who consulted an insolvency practitioner early — it shows responsible conduct.

✔ 4. Avoid new liabilities unless you’re sure they can be met

If uncertain, pause. Continuing to incur debts you can’t repay is a common basis for claims.

✔ 5. Treat all creditors fairly

No special payments to directors, family, connected parties or ‘favourites’.

✔ 6. Protect company assets

No last-minute transfers, settlements or disposals at undervalue.

✔ 7. Keep HMRC informed

Engaging early is always preferable to silence.
HMRC: https://www.gov.uk/government/organisations/hm-revenue-customs

✔ 8. Understand your personal guarantees

Often forgotten until too late – list them, assess exposure, and plan accordingly.

How Insolvency Processes Can Actually Reduce Liability

Directors often assume that entering a formal insolvency procedure increases personal risk. In reality, it usually reduces it, because:

  • control transfers to an office‑holder,

  • wrongful trading exposure stops at the point of appointment,

  • creditors’ interests become clearly managed,

  • directors demonstrate responsible behaviour.

Relevant process overviews are available here:
https://www.gov.uk/government/collections/insolvency-service-guidance-publications

Takeaway Checklist

Use this quick reference list to assess whether you’re doing the right things:

  • Do I have up-to-date, accurate financial information?

  • Are board decisions being properly minuted?

  • Are creditor interests being considered at every step?

  • Have we paused unnecessary new liabilities?

  • Are we avoiding preferences and undervalue transactions?

  • Have we engaged an insolvency practitioner for early guidance?

  • Are company assets secure, documented and accounted for?

  • Have we reviewed personal guarantees and potential exposure?

  • Is HMRC aware of any arrears or payment issues?

  • Are we planning responsibly rather than relying on optimism?

Final Thoughts

Personal liability is not something to fear if you take the right steps early. The directors who face problems are usually those who:

  • delayed decisions,

  • failed to keep records,

  • continued trading without a plan, or

  • ignored professional advice.

But with good governance, open communication and early professional input, most directors can navigate financial distress safely – and responsibly.