Running a business comes with risk. But when cash flow dries up, creditor pressure mounts, and your company can no longer pay its debts as they fall due, those risks start to shift.
If your business is showing signs of financial distress or insolvency, you need to be fully aware of your legal responsibilities as a director. Failing to act appropriately could lead to serious consequences - including personal liability, director disqualification, or even criminal charges.
In this blog, we’ll explain what happens when your company becomes insolvent, outline your duties as a director, and offer practical insolvency advice for directors.
So, if your business is struggling and you're unsure about your next steps, rest assured that McAlister & Co is here to guide you with confidential, jargon-free advice tailored to your situation.
The Lowdown on Directors’ Duties
When a business is solvent, your primary duty as a director is to act in the best interests of the company and its shareholders. However, once insolvency is on the cards, that duty shifts: you must now act in the best interests of the company’s creditors.
This means making decisions that avoid increasing the debts owed and preserve the company’s assets wherever possible. Failing to do this can expose you to serious legal risks - including accusations of wrongful trading, fraudulent trading, or breach of fiduciary duty.
Key Responsibilities for Directors of an Insolvent Company
1. Cease Trading Immediately
If you believe the company cannot avoid insolvent liquidation, you must stop trading. That means no new orders, no further credit agreements, and no payments to selected creditors. Continuing to trade while insolvent can lead to a wrongful trading charge under Section 214 of the Insolvency Act 1986.
2. Do Not Favour One Creditor Over Another
Paying off one creditor ahead of others (known as a "preference") may seem well-intentioned, but it’s legally problematic. If a liquidator finds that you’ve favoured a creditor, particularly a connected party, that transaction could be challenged and reversed. Learn more about preference payments here.
3. Preserve Company Assets
Any attempt to move, hide or undervalue assets to shield them from liquidation will raise red flags. Directors found to be shifting assets unlawfully can face charges of fraudulent trading and may even be held personally liable for losses.
4. Prepare a Statement of Affairs
As a director, you're responsible for compiling a comprehensive view of the company’s financial position - which includes a breakdown of assets, liabilities, creditors, staff, and trading history. This document is essential for informing the appointed insolvency practitioner and is a legal requirement during liquidation.
5. Co-operate Fully with the Insolvency Practitioner
Finally, once your company becomes insolvent, it’s paramount that you co-operate with the insolvency practitioner. Directors must hand over all books and records, attend interviews with the liquidator, and answer all questions fully and honestly. Non-compliance can delay the process and even lead to court action.
What Is Wrongful Trading?
Wrongful trading occurs when a director continues to trade despite knowing (or if they should have known) that the company had no realistic prospect of avoiding insolvency. You don’t need to act with fraudulent intent - just poor judgement could be enough to trigger this charge.
If found guilty, you could:
- Be held personally liable for company debts
- Face director disqualification for up to 15 years
- Be ordered to compensate creditors
Fraudulent trading, meanwhile, is more serious and involves deliberate deception or dishonest intent. This carries criminal penalties, including fines and imprisonment.
If you're confused about the difference between the two, be sure to check out this blog about wrongful trading versus fraudulent trading.
Risk of Director Disqualification
Another thing to bear in mind when considering your responsibilities and duties as a director is that the Insolvency Service has the power to disqualify directors for misconduct during the period leading up to insolvency. This might include:
- Failing to keep proper accounting records
- Not submitting annual returns or accounts
- Trading while insolvent
- Failing to pay tax or employee wages
Disqualification typically lasts 2–15 years and prohibits you from acting as a director or being involved in company management during that time.
What Should You Do if Your Business Is in Trouble?
So, what should you do if your business is struggling financially to ensure you fulfil your responsibilities? The most important step you can take is to seek early advice. The earlier you act, the more options will be available - and the more chance there is to avoid formal insolvency.
1. Speak to an Insolvency Practitioner
At McAlister & Co, we offer confidential, no-obligation consultations. We’ll help you understand your duties, assess the financial state of your company, and explore all the options available - from informal repayment plans to full restructuring or liquidation.
2. Avoid Making Panic Decisions
In a time of stress, it’s easy to make reactive decisions like selling off assets or taking on more debt. These can make things worse and increase your personal risk, which is why it’s so important to get professional advice before taking any action.
3. Understand All Your Options
It’s also really important that you understand all the different options available to you so you can make the right choices. We’ll help you explore recovery options such as company voluntary arrangements, business recovery options, pre-pack administration, and creditors’ voluntary liquidation if closure is the best route forward.
Insolvency Advice for Directors from McAlister & Co
If your business is facing insolvency, look no further than our expert team at McAlister & Co for insolvency advice for directors that’s honest, practical, and above all - personal. With over 20 years of experience, we’ve helped thousands of directors protect themselves and make informed choices under pressure.
If your company is in trouble, don’t ignore the signs and hope they go away. As a director, you're not expected to be a financial expert - but you are expected to act responsibly. And at McAlister & Co, we’re here to make that easier.
So, if you need tailored, confidential insolvency advice for directors so you can understand your legal obligations and protect your future, don’t wait until it’s too late. Contact McAlister & Co for a free, confidential consultation today.