TRW & Co · Banking, Finance & Restructuring
Insolvency Advice for Directors in London
Insolvency advice for directors explains what changes when a company is in financial difficulty: the duty to consider creditors, the risk of wrongful trading, misfeasance and preference claims, disqualification and HMRC liability, and the rescue or exit options available. Acting early, documenting decisions and avoiding preferences are the best protection for directors and creditors alike.
Key pointSince BTI v Sequana, the creditor duty bites when insolvency is imminent or probable, so the board's contemporaneous minutes are often a director's strongest defence.
At a glance
Creditor duty trigger
The Supreme Court in BTI v Sequana held the duty is engaged when a company is insolvent, bordering on insolvency, or insolvent liquidation or administration is probable.
Wrongful trading test
Sections 214 and 246ZB apply where a director knew or ought to have concluded insolvent liquidation or administration could not reasonably be avoided.
Disqualification range
Under section 6 of the Company Directors Disqualification Act 1986, disqualification for unfit conduct lasts between two and 15 years.
Look-back periods
Undervalue transactions and connected-party preferences can be challenged if made within two years before insolvency; other preferences within six months.
Phoenix name ban
Directors of a company in insolvent liquidation cannot use the same or a similar name for five years without an exception or court permission.
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Why insolvency advice for directors matters before the company fails
Insolvency advice for directors is most valuable when it is taken early: when cash forecasts turn negative, HMRC arrears build up, a lender reserves its rights or a major creditor threatens a winding-up petition. At that point the law changes what directors must do. They remain in charge of the company, but they must give real weight to creditors' interests, and decisions taken in the next few weeks will be examined in detail if the company later enters liquidation or administration.
Directors who act reasonably and keep a record of why they acted are rarely found personally liable. Directors who keep trading on hope, pay connected creditors first, move assets to a new company or ignore tax debts are the ones who face claims, disqualification and, in serious cases, criminal investigation. The difference is usually the quality of the advice and the paper trail.
This page explains the duties and liabilities that apply in England and Wales, the options for rescuing or closing the business, and the practical steps a board should take. It is written for directors, including non-executive and shadow directors, founders, investor-appointed directors and the general counsel who advise them.
When is a company insolvent?
Section 123 of the Insolvency Act 1986 sets out when a company is deemed unable to pay its debts. The two working tests are cash flow (the company cannot pay its debts as they fall due) and balance sheet (its liabilities, taking contingent and prospective liabilities into account, exceed its assets). A company is also deemed unable to pay if it fails for three weeks to pay, secure or compound a debt exceeding £750 after a statutory demand, or if enforcement of a judgment is returned unsatisfied.
Boards should not wait for a formal test to be met. A company may be technically solvent today but heading towards insolvency because a refinancing has failed, a covenant breach is likely or a large claim is pending. The duties discussed below are triggered by that trajectory, not only by the moment the company runs out of cash.
Our guides on statutory demands and winding-up petitions explain how creditors use these tests in practice and how a company can respond.
Directors' duties when insolvency looms
The creditor duty under section 172(3)
Under section 172 of the Companies Act 2006 directors must promote the success of the company for the benefit of its members. Section 172(3) preserves the common law rule that, in certain circumstances, directors must consider or act in the interests of creditors. In BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court held that this creditor duty is engaged when a company is insolvent or bordering on insolvency, or when an insolvent liquidation or administration is probable. A real risk of insolvency is not enough on its own.
Once engaged, the weight given to creditors increases as the company's position worsens. Where insolvent liquidation or administration is inevitable, creditors' interests become paramount. This is a duty owed to the company, so it is usually enforced after the event by a liquidator or administrator, often through a misfeasance claim under section 212 of the Insolvency Act 1986.
Other duties continue
The ordinary duties in the Companies Act 2006 still apply: acting within powers, independent judgment, reasonable care, skill and diligence, avoiding conflicts and declaring interests. A financially distressed company often needs quick decisions on refinancing, asset sales and connected-party support, and each of those raises conflict and disclosure questions. Our article on directors' duties in the UK covers the general framework.
Personal liability: the claims directors face
Good insolvency advice for directors starts with understanding what an office-holder or regulator could later allege. The main exposures are set out below.
| Exposure | Source | Who brings it | What must be shown |
|---|---|---|---|
| Wrongful trading | Insolvency Act 1986, s 214 (liquidation) and s 246ZB (administration) | Liquidator or administrator | The director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation or administration, and did not take every step to minimise loss to creditors |
| Fraudulent trading | Insolvency Act 1986, s 213; also a criminal offence under the Companies Act 2006 | Liquidator; prosecuting authorities | Business carried on with intent to defraud creditors or for a fraudulent purpose |
| Misfeasance and breach of duty | Insolvency Act 1986, s 212 | Liquidator, or a creditor or contributory with permission | Breach of duty, including the creditor duty, misapplication of money or property |
| Preferences and transactions at an undervalue | Insolvency Act 1986, ss 238 to 240 | Liquidator or administrator | A preference or undervalue transaction within the relevant time: two years for undervalue transactions and connected-party preferences, six months for other preferences |
| Phoenix company restrictions | Insolvency Act 1986, ss 216 and 217 | Criminal sanction and personal liability | A director of the failed company in its last 12 months uses a prohibited name for five years without an exception or court permission |
| Disqualification | Company Directors Disqualification Act 1986, s 6 | Secretary of State, through the Insolvency Service | Unfit conduct as a director of an insolvent company; disqualification for between two and 15 years |
| HMRC joint and several liability | Finance Act 2020, s 100 and Sch 13 | HMRC | Tax avoidance or evasion, repeated insolvency and non-payment, or facilitating penalties, with the company insolvent or at serious risk of it |
Wrongful trading is the claim most directors worry about, but it is often hard for office-holders to prove a specific date and a specific increase in the deficiency to creditors. Misfeasance claims based on the creditor duty, preference claims and disqualification proceedings are frequently more practical risks. Our article on wrongful trading explains the test and the defence in more detail.
Disqualification and compensation orders
Every office-holder must send the Secretary of State a conduct report on each person who was a director in the three years before the insolvency, normally within three months of the insolvency date. The Insolvency Service then decides whether to seek a disqualification order or accept an undertaking. Proceedings must generally start within three years of the insolvency. A disqualified director who acts in breach can become personally liable for the company's debts, and the court can make a compensation order where unfit conduct caused identifiable loss to creditors. Since 2022, the investigation and disqualification regime also extends to directors of dissolved companies.
Options: rescue, restructure or close
Insolvency advice for directors is not only defensive. The board's best protection is usually to identify the option that preserves most value for creditors and take it promptly. The main routes are:
- Informal workout. Negotiated standstills, covenant waivers, time to pay with HMRC and new money from shareholders or lenders. Quick and private, but every material creditor must agree.
- Moratorium. The free-standing moratorium in Part A1 of the Insolvency Act 1986 gives breathing space from creditor action while directors stay in control, under the supervision of a licensed insolvency practitioner acting as monitor.
- Company voluntary arrangement. A binding compromise with unsecured creditors approved by the required majority. See our guide to the company voluntary arrangement.
- Restructuring plan or scheme. Court-sanctioned compromises under Parts 26A and 26 of the Companies Act 2006, used for larger and more complex capital structures. See our article on the Part 26A restructuring plan.
- Administration. An insolvency practitioner takes control to rescue the company or achieve a better result than liquidation, often through a sale of the business. Pre-packaged sales to connected parties in the first eight weeks are subject to the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, which require creditor approval or an independent evaluator's report.
- Liquidation. A creditors' voluntary liquidation initiated by the directors and shareholders, or compulsory liquidation on a creditor's petition. Our comparison of administration and liquidation explains the differences.
Our restructuring and insolvency team advises companies on these processes; this page focuses on the directors' own position, which can differ from the company's.
What directors should do now: a step-by-step plan
When warning signs appear, these steps protect creditors and the directors themselves. They are also what an office-holder or the Insolvency Service will look for later.
- Get an accurate picture of the numbers. Prepare a short-term cash flow forecast, an aged creditor list including HMRC, and a realistic balance sheet. Update them weekly while the company is in difficulty.
- Take independent advice. Instruct solicitors and a licensed insolvency practitioner for the company, and consider whether individual directors, particularly those who are also shareholders, lenders or guarantors, need separate advice.
- Hold frequent, minuted board meetings. Record the information considered, the options reviewed, the advice received and why the board believes its chosen course is in creditors' interests or minimises their losses.
- Stop transactions that look like preferences. Do not repay director loans, connected-party debts or guaranteed bank debt ahead of other creditors without advice. Do not move assets or customers to a new company.
- Manage new credit carefully. Avoid taking deposits or supplier credit that the company cannot reasonably expect to honour. Ring-fence customer money where appropriate.
- Engage with HMRC and key creditors. Unpaid PAYE and VAT attract particular scrutiny and HMRC now has secondary preferential status for certain taxes. Time to pay arrangements can buy time if they are realistic.
- Choose and implement a route. Once a rescue is no longer realistic, move to a formal process promptly. Delay is the most common basis for wrongful trading and misfeasance claims.
- Preserve records. Keep board packs, forecasts, correspondence and advice. They are the directors' best evidence if their conduct is later questioned.
The every-step defence to wrongful trading is judged with hindsight against what a reasonably diligent director with the same knowledge, skill and experience would have done. Minutes written at the time, showing the information the board had and why it continued or stopped trading, are far more persuasive than explanations given years later in a witness statement.
Documents and evidence directors should assemble
The first thing we ask for when giving insolvency advice for directors is the paper trail. Gather these early and keep them updated:
- Management accounts, cash flow forecasts and the assumptions behind them, with dated versions.
- Board minutes and papers, including records of dissent by any director.
- Professional advice received from solicitors, accountants and insolvency practitioners.
- Correspondence with lenders, HMRC, landlords and major creditors, including any reservation of rights or demands.
- Records of payments to directors, shareholders and connected companies, and the director's loan account.
- Personal guarantees, security and indemnities given by directors. Our article on personal guarantees explains how they are enforced.
- Directors' and officers' insurance policies, including notification requirements and run-off cover.
Risks and common mistakes
Trading on in the hope that something will turn up
Continuing to trade is not wrong in itself. Many companies recover, and closing too early can destroy value. The risk comes from trading on without a credible plan, without up-to-date numbers and without considering whether creditors are being harmed. Directors should be able to explain, at each stage, why they reasonably believed continuing would reduce losses to creditors or give a realistic prospect of avoiding insolvent liquidation or administration.
Paying the creditors closest to the directors
Repaying a director's loan, a connected company or a bank debt the director has personally guaranteed, while other creditors go unpaid, is a classic preference. For connected parties the look-back period is two years, and the desire to prefer is presumed. The office-holder can ask the court to reverse the payment, and the conduct is likely to feature in the conduct report and in any disqualification case.
Ignoring HMRC debts
Unpaid PAYE, national insurance contributions and VAT are viewed seriously because they include money collected from employees and customers. HMRC can seek joint and several liability notices against individuals in specified cases under the Finance Act 2020, can issue personal liability notices for certain national insurance failures, and its debts weigh heavily in disqualification decisions. Engaging early, rather than letting arrears grow, is almost always the better course.
Setting up a new company with the same name
A director of a company that goes into insolvent liquidation cannot, for five years, be involved with a company using the same or a similar name unless an exception applies or the court gives permission. Breach is a criminal offence and creates personal liability for the new company's debts. The statutory exceptions, including a notice procedure for buying the business from an office-holder, must be followed exactly.
Assuming a non-executive or nominee role gives protection
Non-executive directors, investor-appointed directors and shadow directors can all face claims. The law judges them against what they knew and what someone in their role should have known. Nominee directors must exercise their own judgment and cannot simply follow their appointor's instructions, particularly once creditors' interests are engaged. Separate advice is often needed where the appointor is also a lender or shareholder.
Directors are rarely criticised for taking advice and acting on it. They are criticised for delay, for favouring themselves or those close to them, and for failing to record why they made the decisions they did.
Cross-border groups, Scotland and Northern Ireland
Insolvency advice for directors must start with which law applies. The provisions discussed above are mainly England and Wales law. Scotland shares many Insolvency Act 1986 provisions, including wrongful trading, but has its own rules on challengeable transactions (gratuitous alienations and unfair preferences) and its own court procedures. Northern Ireland has a parallel code under the Insolvency (Northern Ireland) Order 1989 and its own disqualification legislation.
Directors of UK subsidiaries of overseas groups face particular pressure. Group treasury may want cash swept up, intra-group debts settled or guarantees given. Once the UK company is near insolvency, those decisions must be judged by reference to its own creditors, not the group's interests. Directors of UK companies owned from Bangladesh, the Gulf, Singapore or China should ensure that instructions from the parent are tested against their duties and recorded.
Where the business has assets or creditors abroad, the Cross-Border Insolvency Regulations 2006 and foreign recognition rules affect how a UK process works. Bangladesh has not adopted the UNCITRAL Model Law, so recovery steps there usually require local proceedings. TRW & Co's Dhaka practice can advise on that side, alongside our contentious insolvency team in London.
How TRW & Co provides insolvency advice for directors
TRW & Co's London office is authorised and regulated by the Solicitors Regulation Authority. We act for directors individually and for boards, and work alongside licensed insolvency practitioners, accountants and D&O insurers. Where advocacy in the higher courts is required, we instruct specialist counsel.
Early warning reviews
We review forecasts, creditor pressure and board processes, explain when the creditor duty is likely to be engaged and set out a decision record the board can rely on later.
Board and individual advice
We advise boards on options and minutes, and individual directors on conflicts, guarantees, loan accounts and whether they need separate representation.
Process selection
We help directors choose between workouts, moratoriums, CVAs, restructuring plans, administration and liquidation, with our restructuring colleagues and the company's insolvency practitioner.
Claims by office-holders
We defend wrongful trading, misfeasance, preference and undervalue claims, including early engagement with liquidators to narrow issues and explore settlement.
Disqualification proceedings
We respond to Insolvency Service questionnaires and interviews, advise on undertakings versus contested proceedings, and act on compensation order and permission-to-act applications.
HMRC and insurance
We advise on joint and several liability and personal liability notices, time to pay discussions with our tax disputes team, and notifying D&O insurers.
Directors seeking insolvency advice for directors in a group or governance context may also need our corporate governance team. See the full range of our work on our practices page.
Checklist for directors
- Do we have a current cash flow forecast and creditor list, updated at least weekly?
- Is the company insolvent or bordering on insolvency, and is the creditor duty now engaged?
- Have we taken independent legal and insolvency practitioner advice, and do any directors need separate advice?
- Are board meetings frequent and minuted with the information, options and reasons for each decision?
- Have we stopped payments to directors, connected parties and guaranteed creditors that could be preferences?
- Are PAYE, national insurance and VAT being paid, or is a realistic time to pay arrangement in place?
- Have we notified our D&O insurers where required and checked run-off cover?
- Do we know which formal process we would use if the rescue plan fails, and when we would trigger it?
For confidential insolvency advice for directors, contact TRW & Co at info@trw.co or +880 1779 127165, or visit Holborn Gate, 330 High Holborn, London WC1V 7QH.
Frequently asked questions
01When should a director take insolvency advice?
As soon as there is real doubt about the company's ability to pay its debts as they fall due or about its balance sheet, for example after a failed refinancing, a likely covenant breach, growing HMRC arrears or a statutory demand. The creditor duty is engaged when insolvency is imminent or probable, and decisions made from then on will be scrutinised. Early advice widens the options available and gives the board time to create a clear record of its reasoning.
02Can I be personally liable for my company's debts?
Not usually, because a limited company is a separate legal person. Personal liability arises in specific situations: wrongful or fraudulent trading, misfeasance or breach of duty, breach of the phoenix name rules, acting while disqualified, HMRC joint and several liability notices, personal guarantees you have signed, and some national insurance failures. Most of these depend on how directors behaved once the company was in difficulty, which is why advice and records matter.
03What is wrongful trading?
Wrongful trading under section 214 of the Insolvency Act 1986 (and section 246ZB for administration) applies where a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration and then failed to take every step to minimise potential loss to creditors. The court can order the director to contribute to the company's assets. The defence depends on showing the steps taken after that point, so contemporaneous evidence is important.
04Will I be disqualified if my company goes into liquidation?
Not automatically. The liquidator or administrator must report on every director's conduct to the Insolvency Service, which decides whether to seek a disqualification order or undertaking for unfit conduct. Common grounds include non-payment of Crown debts, trading to the detriment of creditors, preferences and failing to keep records. Disqualification lasts between two and 15 years. Directors who cooperate, took advice and treated creditors fairly are in a much stronger position.
05Can I repay my director's loan before the company goes under?
Doing so without advice is risky. Repaying a director or other connected person ahead of other creditors may be a preference that the liquidator can reverse, and for connected persons the look-back period is two years and the intention to prefer is presumed. It is also likely to be raised in a disqualification investigation. If repayment is proposed, the commercial reasons and creditors' position should be documented and advice taken first.
06Can I buy the business back from the administrator?
Yes, but connected-party sales are closely regulated. If a connected person buys all or a substantial part of the business or assets in the first eight weeks of administration, the sale needs creditor approval or a report from an independent evaluator under the 2021 regulations. If the company goes into liquidation, the phoenix name restrictions also apply. The process should be planned with the administrator and independent advisers.
07Do non-executive directors face the same risks?
Broadly, yes. Non-executive, nominee and shadow directors can face wrongful trading, misfeasance and disqualification claims. The court assesses each director against the knowledge, skill and experience reasonably expected of someone in their role, plus any greater skills they actually have. Non-executives should ask for adequate financial information, challenge management and record any concerns in board minutes.
Sources and official materials
- Insolvency Act 1986 — Wrongful trading, misfeasance, preferences and phoenix rules
- Company Directors Disqualification Act 1986 — Disqualification, conduct reports and compensation orders
- Companies Act 2006, section 172 — Duty to promote success and the creditor duty
- UK Supreme Court: BTI 2014 LLC v Sequana SA — When the creditor duty is engaged
- Finance Act 2020, Schedule 13 — HMRC joint and several liability notices
- The Insolvency Service — Investigations and director disqualification
- GOV.UK: Director information hub — Official guidance on directors' responsibilities
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.