Director duties when your company is insolvent do not disappear — they change focus. The moment your company can no longer pay its debts as they fall due, or its liabilities exceed its assets, your legal duty shifts from acting in the interests of shareholders to acting in the interests of creditors as a whole. Getting this shift wrong is one of the most common ways directors end up personally exposed, so understanding it early matters.
This guide sets out how to tell if your company is insolvent, how your duties change, what you must stop and start doing, and where limited liability still protects you. It is general information, not legal or insolvency advice.
Many directors first encounter this issue not through a formal insolvency process, but through a difficult day-to-day decision: whether to pay HMRC, a supplier, or themselves this month. Understanding the legal framework behind that decision, before you make it, is what protects you later.
How to tell if your company is legally insolvent
Insolvency has a precise legal meaning under the Insolvency Act 1986. There are two main tests, and you only need to fail one of them.
- Cash-flow insolvency: your company cannot pay its debts as they fall due, even if it holds valuable assets.
- Balance-sheet insolvency: your company's total liabilities exceed its total assets, including contingent and prospective debts.
Common early warning signs include mounting HMRC arrears, missed supplier payments, reliance on the overdraft to cover payroll, and creditors threatening a statutory demand. If any of these feel familiar, it is worth checking your position properly rather than waiting for a formal notice.
A useful discipline is to prepare a simple, honest statement of affairs: list every asset at a realistic value, then list every liability, including HMRC, trade creditors, leases and any contingent claims. If liabilities exceed assets, or you cannot see how forthcoming bills will be paid, treat the company as being in the insolvency danger zone even before any formal step is taken.
Director duties when your company is insolvent: the big shift from shareholders to creditors
While a company is solvent, directors owe their duties primarily to the company and, in practice, to its shareholders. Once insolvency is likely — not just actual, but reasonably foreseeable — the law expects directors to start considering creditors' interests too.
This principle comes from case law interpreting section 172 of the Companies Act 2006, which requires directors to promote the success of the company but expressly recognises that this duty is affected once insolvent liquidation becomes likely. In plain terms: paying a dividend, taking a large salary, or favouring one creditor over another all look very different once the company's money effectively belongs to its creditors rather than its owners.
This is often described as the duty to creditors, though it is more accurate to say the existing statutory duties are simply reinterpreted through a creditor lens. You are not gaining a brand-new duty out of nowhere; you are applying your familiar director duties in a way that reflects who now stands to lose if things go wrong.
In practice, this means every significant financial decision should be tested against one question: does this decision minimise loss to the body of creditors as a whole, or does it favour the company, its owners, or one individual creditor at everyone else's expense?
Your seven general duties and how insolvency changes them
The Companies Act 2006 sets out seven general director duties. Each one is reinterpreted through a creditor lens once your company is insolvent or nearing insolvency.
- Act within your powers — continue acting under the company's constitution, but be alert to decisions that unfairly prejudice creditors.
- Promote the success of the company — shift your focus to minimising loss to creditors as a whole.
- Exercise independent judgement — do not simply follow a dominant shareholder or fellow director if it risks creditors' money.
- Exercise reasonable care, skill and diligence — take proper financial advice rather than guessing at the company's position.
- Avoid conflicts of interest — be especially careful with related-party payments or transfers to connected companies.
- Not accept benefits from third parties — unchanged, but scrutinised more closely by an insolvency practitioner later.
- Declare interest in a proposed transaction — document any related-party arrangement clearly, in board minutes, before it happens.
None of these duties are suspended by insolvency. What changes is the standard against which your decisions are judged afterwards. A payment that looked like ordinary business sense while the company was solvent can look very different to a liquidator once it is clear creditors' money was at stake.
What you must stop doing immediately
Certain actions become high-risk the moment insolvency is likely. If a liquidator later reviews the company's affairs, these are the decisions most likely to be challenged.
- Paying yourself or connected directors above what the company can genuinely afford.
- Repaying director loans to yourself ahead of ordinary trade creditors.
- Selling company assets at undervalue, including to yourself or family members.
- Favouring one creditor over others without a proper commercial reason — known as a preference.
- Taking on new credit or new orders you have no reasonable prospect of paying for, sometimes known as wrongful trading.
If you continue trading while knowing, or where you ought to have known, there was no reasonable prospect of avoiding insolvent liquidation, you may be found personally liable for wrongful trading under section 214 of the Insolvency Act 1986. Our guide to what is wrongful trading? A director's guide explains how this test is applied in practice.
What you should start doing to protect creditors
Directors who act promptly and reasonably at this stage are generally treated very differently from those who ignore the warning signs. Practical steps include the following.
- Get an up-to-date picture of the company's true financial position, including all HMRC and trade debts.
- Stop any payments that unfairly favour one creditor over others.
- Consider whether trading can continue safely, and for how long, based on realistic cash-flow forecasts.
- Take independent advice from a regulated insolvency practitioner or solicitor before major decisions.
- Communicate honestly with creditors, including HMRC, rather than avoiding contact.
Acting early on the duty to creditors in an insolvency situation is generally the single biggest factor that determines whether a director's conduct is later seen as reasonable.
It also helps to separate ordinary trading decisions from restructuring decisions. Continuing to buy stock, pay staff and deliver to customers is usually fine while there remains a genuine, realistic prospect of trading out of difficulty. The risk arises when that prospect has effectively gone and trading simply increases the debts owed to creditors who will never be repaid.
Record-keeping and board decisions that protect you
Good records are one of the simplest ways to demonstrate you met your directors' responsibilities as an insolvent company approached the point of no return.
- Minute board meetings where financial difficulty is discussed, including the reasoning behind key decisions.
- Keep cash-flow forecasts, management accounts and correspondence with creditors and advisers.
- Note the date insolvency became apparent or likely, and what steps followed.
- Record any professional advice taken, and whether it was followed.
A liquidator or the Insolvency Service will look closely at this evidence. Clear, contemporaneous records showing you understood the creditor interest duty and acted on it can make a significant difference to how your conduct is assessed.
Records made at the time carry far more weight than an explanation reconstructed months later. If you are unsure how to document a difficult decision, a short, factual minute recording what was discussed, why a particular course was chosen, and what alternatives were considered is usually enough to show the board was acting in good faith.
The consequences of getting it wrong
Breaching your duties as a director of an insolvent company can lead to several outcomes, depending on the seriousness of the conduct.
- Disqualification as a director for up to 15 years under the Company Directors Disqualification Act 1986.
- Personal liability to contribute to the company's assets, for example under wrongful trading or preference provisions.
- Misfeasance claims brought by a liquidator for breach of duty.
- In serious cases involving dishonesty, criminal proceedings such as for fraudulent trading.
These outcomes are investigated and pursued by a liquidator or the Insolvency Service, not automatically triggered by insolvency itself. Directors who can show they understood their duties and acted reasonably are in a much stronger position. Our related article on am I personally liable for company debts? covers this in more depth.
A liquidator's report is submitted to the Insolvency Service, and conduct is measured against what a reasonably diligent director would have known and done at the time, not with the benefit of hindsight. This is why the record-keeping described above matters so much — it lets you show your reasoning as it genuinely was, rather than leaving a liquidator to guess at your intentions from bank statements alone.
Where limited liability still protects you
It is worth being clear about what does not change. Limited liability continues to protect directors from being automatically responsible for the company's debts simply because the company has failed.
Genuine business failure, on its own, is not a breach of duty. Most company insolvencies involve no wrongdoing at all — trading conditions change, a major customer fails, or costs rise faster than income. Personal exposure generally only arises from specific conduct, such as wrongful trading, preferences, misfeasance, or a personal guarantee you signed separately from your role as director.
This distinction matters because it means the aim is not to avoid insolvency at all costs, sometimes an impossible task, but to handle the process correctly once it happens. A director who takes early advice, treats creditors fairly, and keeps clear records is very different, in the eyes of the law, from one who ignored the warning signs and kept trading regardless.
Frequently asked questions
When exactly do director duties shift to creditors?
There is no single fixed date. The shift happens once insolvency, or insolvent liquidation, becomes likely — not just when it actually occurs. This is a judgement based on the company's genuine financial position at the time.
Can I still pay some creditors and not others?
You can pay creditors in the ordinary course of business, such as staff wages or key suppliers needed to keep trading. What you must avoid is deliberately putting one creditor, such as yourself or a connected party, in a better position than others without proper commercial justification.
What if co-directors disagree about the company's position?
Each director is individually responsible for exercising independent judgement. If you disagree with fellow directors about whether the company is insolvent or what to do next, raise it formally, get it minuted, and consider taking independent advice rather than simply going along with the majority.
Do director duties change the moment cash flow gets tight?
Not necessarily. Short-term cash-flow pressure is common and does not automatically mean the company is insolvent. The duty shift applies once insolvency is actual or reasonably likely, which is why an honest, up-to-date assessment of the company's position matters.
Will I automatically be personally liable if my company becomes insolvent?
No. Company failure alone does not create personal liability. It is specific conduct — such as wrongful trading, preferences or misfeasance — that can expose a director personally, which is why understanding these duties early is so important.
This article is general information, not legal, financial or insolvency advice, and every company's circumstances are different. If you would like to talk through your situation, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.