What changes, what doesn’t… and what really matters
If you’re running a limited company and the finances are worsening, there’s a moment that sneaks up on you.
Nothing dramatic happens. No alarms. No letters in red ink.
But quietly, in the background, the rules change.
When a company is solvent, directors are there to grow the business for the shareholders. When insolvency is on the horizon, that focus shifts. Not overnight. Not always obviously. But legally and very importantly.
I’ve spent four decades helping directors through this stage, and I can tell you this. Most don’t fall foul of their duties through bad intent. They do it through not knowing where the line is.
So let’s talk about that line. Calmly. Clearly. Without scare stories.
First things first. What does “insolvent” actually mean?
In simple terms, a company is insolvent if it can’t pay its debts as they fall due, or if its liabilities are greater than its assets.
That’s not my opinion. That’s the law.
Common warning signs include:
- HMRC arrears building up
- Pressure from suppliers
- Bounced payments or juggling who gets paid and who doesn’t
- Using tomorrow’s VAT or PAYE to survive today
Sound familiar? You’re not alone.
The big shift. Who do directors owe their duty to?
This is the key point many directors miss.
When a company becomes insolvent, or insolvency is likely, your primary duty shifts away from shareholders and towards creditors.
That includes:
- HMRC
- Trade suppliers
- Lenders
- Anyone the company owes money to
This principle is well established in case law and regularly referenced by the Insolvency Service and the courts. Judgments can be found via BAILII if you’re curious, though most directors don’t need to read them to do the right thing. https://www.bailii.org
So what are directors expected to do?
You’re expected to act reasonably. That’s it.
Not perfectly. Not heroically. Reasonably.
In practice, that means:
1. Stop making things worse
If there’s no realistic prospect of avoiding insolvency, continuing to trade and rack up more debt can become wrongful trading.
This is not about one bad week. It’s about continuing on when you know, or should know, the end result.
2. Treat creditors fairly
Paying one creditor in preference to another can cause real problems later. Especially if that creditor is connected to you personally.
HMRC are particularly sensitive to this. And they have long memories.
3. Protect company assets
Selling assets too cheaply, giving them away, or moving them out of reach can all be challenged by a liquidator.
Yes, even if your intentions were good.
4. Keep proper records
Companies House filings, management accounts, bank statements, board decisions. All of it matters.
If things unravel, the absence of records causes far more trouble than the numbers themselves.
5. Take professional advice early
This one matters more than directors realise.
Seeking advice from a licensed insolvency practitioner at the right time is not a sign of failure. It’s often the strongest evidence that a director took their duties seriously.
The Insolvency Service themselves acknowledge this.
What happens if directors get it wrong?
Sometimes nothing. Sometimes a quiet lesson learned.
But in more serious cases, consequences can include:
- Personal liability
- Repayment orders
- Director disqualification
- Stress that lingers far longer than it needs to
None of this is inevitable. And in my experience, most of it is avoidable with earlier, calmer decisions.
A quick word on HMRC
HMRC are not just another creditor. They have more powers, more data, and more patience than most people expect.
Late VAT returns, PAYE arrears, Time to Pay arrangements that quietly fail. These are all signals they track.
If HMRC are your biggest worry, you’re not failing. You’re at a crossroads. And the route you choose next matters.
Practical tips from the real world
A few things I’ve seen help again and again:
- Write things down. Decisions, reasons, dates. Memory fades. Paper doesn’t.
- Don’t rely on hope as a strategy. Hope is not a plan.
- Talk to someone who isn’t emotionally invested. That’s why insolvency practitioners exist.
- Ignore pub advice, forum myths, and “my mate did this once” stories.
They cause more harm than good.
Takeaway checklist for directors
If you’re unsure where you stand, run through this:
- Can the company pay its debts as they fall due?
- Are HMRC arrears increasing or being juggled?
- Are you paying some creditors while avoiding others?
- Are assets being sold at proper value?
- Are records up to date and accurate?
- Have you taken independent insolvency advice?
If several answers make you uncomfortable, that’s your cue. Not for panic. For action.
Final thought
Insolvency isn’t a moral failing. It’s a commercial outcome.
What defines directors is not whether a business survives, but how they behave when it struggles.
Handled properly, this period can protect you, your reputation, and your future. Handled badly, it lingers far longer than it would otherwise.
If you want to revisit my earlier articles on Creditors’ Voluntary Liquidation, it ties closely into this topic and is worth reading alongside it – just use the search bar.
You’re not expected to know all this. But you are expected to act sensibly once you do.
#Insolvency #DirectorsDuties #WrongfulTrading #CompanyInDifficulty #HMRC #UKInsolvency