There’s a moment most directors can picture, even if they’ve never said it out loud.
You’re staring at the bank balance. Wages are due soon. HMRC is chasing. And your gut is telling you what your head does not want to admit … this isn’t just a “cashflow wobble” anymore.
If that’s where you are, you’re not alone. And you’re not a bad director. But you do need to change how you steer the ship, because once insolvency is on the horizon, the rules shift.
Not dramatically. Not in a scary “you’re in trouble” way. More like … the priority changes from “grow the business” to “protect creditors and avoid making things worse”.
Let’s break it down…
When do director duties start to change?
In everyday trading, directors are generally focused on promoting the success of the company for the benefit of its shareholders.
When insolvency becomes likely, your duties effectively move towards protecting creditors’ interests. It’s not a single switch flicking on. It’s a sliding scale based on what you knew (or indeed ought to have known) and what you did next.
A couple of practical “red flags” I see again and again:
- You can’t pay debts when they fall due (wages, VAT, PAYE, key suppliers).
- You’re juggling which bills to pay … and delaying others.
- Arrears are growing and you’re relying on “next month will be better”.
- You’ve got CCJs, statutory demands, or winding-up petition chatter.
- Your balance sheet looks weak and there’s no realistic way to fill the hole.
That’s the point where you stop and go: Right. We need a plan, and we need evidence we acted responsibly.
The big legal risks directors worry about (and what actually helps)
People often arrive at my office thinking there’s one magic mistake that gets them personally “done”.
Real life’s messier than that.
Most director problems come from the same handful of patterns:
1) Carrying on as if nothing’s changed
Continuing to trade can be completely reasonable … if there’s a genuine, evidenced prospect of avoiding insolvency and you’re taking proper advice. If not, you risk accusations that you made the creditor position worse.
2) Paying the “wrong” people
This is the classic. You keep the lights on by paying the supplier who shouts loudest, or you clear the director’s loan account, or you repay a friendly lender.
But when insolvency is in the frame, certain payments can be challenged later as preferences or transactions at undervalue. In plain English … paying one party in a way that unfairly disadvantages others.
3) Treating HMRC like it can wait forever
HMRC is a major creditor in many small companies now, especially with VAT and PAYE. They also have strong enforcement tools and tend to be less tolerant once Time to Pay is broken. And they are issuing more winding up petitions right now than I have seen in a long time.
If you’re going to approach HMRC, do it with a proper proposal and numbers you can actually hit.
What “good behaviour” looks like when you’re in the danger zone
Here’s what I advise directors to do immediately when insolvency starts to look possible.
Hold a proper board meeting.
Even if it’s just you and a co-director in a small office. Write down what you know, what you’re worried about, and what actions you’re taking.
Get a 13-week cashflow forecast.
Not a vague “we’ll be fine if sales pick up”. A week-by-week view of what’s due and what’s realistically coming in.
Stop digging.
If every extra week of trading increases HMRC arrears and supplier debts with no credible turnaround, that’s digging yourself into a bigger hole.
Take advice early.
Not to rush into liquidation … but to understand options. Sometimes a company or some or all of the business in it can be saved. Sometimes it can’t. Either way, early advice gives you choices.
Be careful with payments.
If you’re insolvent or close to becoming insolvent, avoid anything that looks like:
- repaying directors or connected parties
- paying one creditor in full while others get nothing
- selling assets cheaply to “get cash in”
- taking customer deposits you can’t fulfil
Keep records tidy.
This is boring, but later on you will find it’s esential. Keep:
- management accounts
- bank statements
- creditor lists
- asset lists
- payroll and tax filings
- correspondence with major creditors
A liquidator (or administrator) will ask for these. If they’re missing, it creates suspicion even if nothing improper happened.
Your options, in simple terms
Depending on the numbers, you typically have a few routes:
- Informal turnaround: cost cuts, chasing debtors, renegotiating terms, raising funding … but only if it’s realistic and quick.
- Time to Pay with HMRC: can help, but it’s not a cure-all and it must be affordable.
- Company Voluntary Arrangement (CVA): a formal deal to repay a portion over time (works only if there is a core trade that you can prove is viable).
- Administration: less common for small companies, but can protect a business while it’s restructured or sold.
- Creditors’ Voluntary Liquidation (CVL): an orderly closure when the business can’t be saved, helping draw a line and deal with creditors properly.
None of these are “failure” badges. They’re tools. The key is choosing the right tool at the right time.
Takeaway checklist
If you do nothing else this week, do this:
- Produce a 13-week cashflow forecast (realistic, not hopeful).
- Hold a board meeting and minute the position and decisions.
- Freeze any “non-essential” payments, especially to connected parties.
- Don’t take new orders or deposits if you can’t fulfil them.
- Keep bookkeeping, VAT, PAYE, and accounts up to date.
- Build a clean list of creditors, amounts, and who’s shouting loudest.
- Take licensed insolvency advice early … while you still have options.
One last thought … because it matters.
Most directors I meet didn’t set out to do anything wrong. They’re tired. They’re carrying staff, customers, family pressure, and a constant drip of creditor emails. When you’re in that state, it’s easy to drift into decisions that feel “practical” but look questionable later.
The aim here is simple: make calm, documented decisions that reduce harm, protect creditors, and protect you.
If you need support, you can use my insolvency copilot, VAi, 24/7 and free of charge and anonymously. You will find VAi on the bottom right of every page on my website. Think about watching the guide(s) on how to use it first. Or if you prefer to talk to me, call me on 07813 102014.