Directors' Duties When Facing Insolvency
Your legal obligations as a director once your company is insolvent or approaching insolvency.
Your Duties Change When Insolvency Looms
As a director, your primary duty normally runs to the company and its shareholders. But once the company is insolvent — or you ought to know it is — your duty shifts to the company's creditors.
Key Legal Obligations
1. Minimise Losses to Creditors
You must take every step a reasonably diligent person would take to minimise potential losses to creditors. This is sometimes called the "wrongful trading" test under Section 214 of the Insolvency Act 1986.
2. Do Not Create Preferences
Paying one creditor ahead of others (especially a connected party like yourself or a family member) when the company is insolvent can be challenged as a preference.
3. Do Not Dispose of Assets at Undervalue
Selling company assets for less than their market value can be reversed by a liquidator and may result in personal liability.
4. Keep Proper Records
Maintain up-to-date accounting records. Failure to do so can lead to disqualification proceedings.
5. Seek Professional Advice Early
Taking timely professional advice demonstrates that you acted responsibly, even if the company ultimately enters a formal insolvency procedure.
What Happens If You Breach These Duties?
- Personal liability for company debts.
- Director disqualification for up to 15 years.
- Contribution orders requiring you to pay money into the liquidation estate.
Next Steps
If you are concerned about your personal position, speak with an advisor in confidence. You can also take our free assessment to understand the urgency of your situation.