A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
Directors' Duties When a Company Is Insolvent
When a company is solvent, directors' duties are owed primarily to the shareholders. But when a company is, or may be, insolvent, the law shifts those duties - directors must then act in the interests of creditors, not just shareholders.
Understanding this shift is essential. Failing to adjust your conduct once insolvency is apparent is one of the most common ways directors expose themselves to personal liability.
The Shift in Duties
Under the Companies Act 2006 and established case law, when a company is insolvent, or likely to become insolvent, directors must:
- Consider the interests of creditors - not just shareholders
- Minimise loss to creditors - avoid taking on more debt without a realistic plan
- Not prefer one creditor over another - unless there is a legitimate reason
- Preserve the company's assets for the benefit of creditors
What This Means in Practice
When you know, or should know, the company is insolvent:
- Do not continue trading without a realistic prospect of avoiding insolvent liquidation - this risks wrongful trading
- Do not pay some creditors in preference to others in a way that reduces the assets available to the general body of creditors
- Do not dispose of assets at undervalue or to connected parties
- Keep accurate records and document your decisions
- Take professional advice - doing so is strong evidence of responsible conduct
The Role of Advice
Taking professional advice as soon as you suspect insolvency is one of the strongest protections available. It demonstrates that you have acted responsibly, considered creditors' interests, and sought to minimise loss.
What to Do
If you think the company may be insolvent:
- Stop and assess - get an honest view of the financial position
- Take advice from a licensed insolvency practitioner
- Consider the options - rescue (CVA, administration) or closure (CVL)
- Document your decisions and the reasoning behind them
- Prioritise creditors' interests in every decision
Speak to a Licensed IP
Understanding your duties is the best protection for you and the best outcome for creditors. Our Manchester-based practitioners will assess your position and advise honestly - free and confidential.