Director Responsibilities when a company is trading while insolvent

When you realise your company is insolvent, it becomes your responsibility as a director to act in the best interests of creditors. This may involve discontinuing trading to shield creditors from additional losses. Your company is deemed insolvent if it cannot meet its expenses and settle the money owed to creditors.


Who is considered a director?

You don’t need to be a registered director to be held accountable for acting in the best interest of creditors. 

If you actively influence the company’s direction or provide instructions to directors (referred to as ‘shadow directing’), you are legally responsible for ensuring the company takes the necessary steps to settle outstanding debts.

For instance, if you guide the company’s direction and contribute to crucial decision-making, the court may view you as a director, even if you’re not formally registered with Companies House.


What are the Duties and Responsibilities of Directors in Times of Insolvency?

As a company director, continuing to trade after your business becomes insolvent poses the risk of neglecting your legal duties and responsibilities.

If your company is incapable of meeting its financial obligations when due or its liabilities surpass its assets, it may be deemed a balance sheet or cash flow insolvent. As the director of an insolvent company, your duties and responsibilities change once the business lacks funds and becomes insolvent. Failing to uphold these responsibilities could lead to allegations of wrongful trading, making you personally liable for certain company debts.

Upon insolvency, directors have a legal duty to creditors to minimise their losses. This often involves ceasing trading immediately, although it’s not always the case. If your company becomes insolvent, seeking the assistance of a licensed insolvency practitioner is crucial. They can assess the situation and provide advice on your next steps.


Prohibited Actions for Directors in Insolvency

If a director manages a financially troubled company, they could face personal responsibility for the company’s debts if they do any of these things:

1. Transactions at Undervalue

If you sell company assets well below market value or give them away without payment, the court can undo these transactions. Diminishing the company’s assets harms all creditors, breaching your legal duties.

2. Taking on borrowing with no intention of repaying

If you make new deals, collect customer deposits, or secure funding without planning to repay or fulfil orders, you could be charged with fraudulent trading. This is a grave offence, carrying a potential 7-year prison term and personal responsibility for company debts.

3. Resuming to trade while knowingly insolvent

If you carry on trading when aware that your company is insolvent and unlikely to recover, it’s termed wrongful trading. Continuing in this manner may worsen your creditors’ situation, leading to additional financial losses for them. Once you’re aware of your company’s insolvency or the likelihood of it, seek guidance from a licensed insolvency practitioner for your next steps.

4. Preference payments

The directors and any appointed administrator of a company must act in the best interests of all creditors collectively. Repaying specific debts over others is not permitted. For instance, favouring a personally guaranteed debt or one owed to a friend or family member without addressing other debts may be seen as giving preference to certain creditors. If the court deems this, they can undo the repayments, compelling the repaid creditor to return the funds to the insolvent company.


Director duties and liquidation

Fulfilling your duties as the director of an insolvent company is crucial, especially if the company undergoes a formal insolvency process like liquidation, either voluntarily through a CVL or forced by the court in a compulsory liquidation.

In liquidation, the appointed insolvency practitioner must investigate the company’s affairs to uncover the cause of insolvency and assess if the directors’ actions played a role. They’ll examine your conduct when you should have known about the insolvency, focusing on your transactions and how long you traded.

Contacting an insolvency practitioner at the first sign of insolvency shows your commitment to protecting creditors’ interests and upholding your legal responsibilities as the director of an insolvent company.




How Vanguard Insolvency can help 

If your company is insolvent and you’re concerned about staying within legal boundaries, our licensed insolvency practitioners can offer the assistance and guidance you require. With 100 offices throughout the UK, expert and confidential advice is always within reach. 

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.