What directors should NOT do
Just as important as the steps you should take are the actions to avoid. In the zone of insolvency, certain behaviours can quickly put you on the wrong side of the law. Here are some critical “don’ts” for directors like John navigating a financial crisis:
- Don’t bury your head in the sand: Ignoring the problem is the worst mistake. Pretending everything is fine and carrying on business-as-usual when you know insolvency is looming is a fast track to wrongful trading. If you have that gut feeling (or clear financial evidence) that the company is insolvent or close to it, do not continue trading blindly hoping for a miraculous turnaround. Hope alone is not a strategy. Continuing to take customer orders and racking up new supplier debts when you know you can’t pay them is exactly what gets directors in trouble. In the earlier example, if John had simply kept quiet and continued signing purchase orders, he could later have been held personally liable for worsening the creditor deficit.
- Don’t incur debt you can’t repay: This ties closely to not worsening the creditors’ position. As a director, once you’re aware of insolvency risks, do not borrow more money or extend credit terms just to prolong the company’s life unless you are confident it will help turn things around (and you have advice in writing to back that up). Taking an emergency loan, especially secured against the company’s remaining assets, might just shift risk to a new creditor or make an insolvent liquidation even more painful. Likewise, don’t order goods or services on credit knowing your company can’t pay – that’s essentially taking money from one creditor’s pocket to pay another, which is unethical and potentially unlawful. If an insolvency process occurs, the liquidator will look at when new debts were incurred and whether that was appropriate. So, hold off on that last-ditch debt-fuelled gamble, it could be seen as a “wrongful trading” gamble if it fails.
- Don’t play favourites with creditors: We mentioned treating creditors equally as a “do,” and conversely, favouritism is a big “don’t.” Do not repay loans to certain friendly creditors (or family members who lent money to the company) right before a collapse. Don’t move assets to pay off those you feel sorriest for, while others get left in the cold. Such preferential treatment can be unwound by an Administrator or Liquidator, and it may also be evidence that you were not acting in the collective interest of creditors. All creditors are suffering, you as a director shouldn’t be picking winners and losers (the law provides some exceptions, but those are handled in formal processes). If you’re considering paying one creditor urgently (say, to keep essential supplies coming), document why that payment was necessary for the benefit of all creditors, not just that one. Without a sound reason, hold off and get advice rather than creating a preference.
- Don’t mislead or conceal: Honesty is truly the best policy here. Do not engage in any form of misrepresentation – whether to creditors, auditors, or insolvency practitioners. Lying about your company’s financial state to buy time can cross into fraudulent trading if money is obtained under false pretences. Similarly, don’t hide assets or fabricate records. In an insolvency investigation, these actions are red flags that could lead to allegations of fraud or misconduct. John, in our story, might be tempted to “smooth over” the numbers to keep suppliers delivering, but doing so would only postpone the inevitable and increase his personal peril. Full disclosure to your advisors and following their advice is always the safest path.
- Don’t ignore professional advice or legal duties: If you do bring in an insolvency practitioner or lawyer, don’t disregard their advice. In the BHS case, the board had indeed sought advice on wrongful trading and the creditor duty – but then failed to follow it. The court took a dim view of the fact that the directors essentially paid lip service to getting advice and then carried on a risky path. Getting expert advice won’t shield you from liability if you then choose to ignore that advice. Likewise, don’t neglect your statutory duties, for example, continue to file any necessary documents like VAT returns; ceasing to comply with legal obligations can worsen your position and indicate you’ve checked out of your responsibilities. In short, listen to your experts and act conscientiously; don’t just go through the motions.
- Don’t attempt risky “Last Roll of the Dice” strategies without care: When facing doom, some directors are tempted by hail-Mary passes – perhaps launching a new project or making a drastic pivot in the hope of a big payoff. Be extremely cautious with this instinct. Courts have noted that embarking on very risky transactions in a last-ditch effort, without regard to creditor downside, can be a breach of duty. This doesn’t mean you shouldn’t try everything in your power to save the company, but any rescue strategy should be grounded in reason and professional input. If your plan amounts to gambling the remaining company assets on a long shot, stop. It’s better to preserve what’s left for an orderly insolvency than to double-down and lose everything, which will certainly be criticised later.
Navigating the twilight zone responsibly
The overarching theme for any director in John’s shoes is this: seek help early and don’t go it alone. The sooner you get insolvency professionals involved, the more options you’ll have, possibly even options to save the business. In England and Wales, there are now more rescue tools available than ever, from formal turnaround plans to new procedures introduced in recent years. For instance, the Corporate Insolvency and Governance Act 2020 introduced a free-standing moratorium (a breathing space from creditors) and a new restructuring plan process. These tools can only help if you engage with them in time. A licensed insolvency practitioner can advise whether negotiating a CVA with creditors or feasible and whether the Company could benefit or if a moratorium is needed to buy a few weeks’ breathing space.
John decided to consult an insolvency expert when he still had some cash in the bank and that decision was pivotal. With professional guidance, he learned that placing the company into Administration could potentially sell the viable part of the business to a new owner, saving jobs and paying suppliers a better return than a liquidation would. By acting early, he also avoided wrongful trading liability because he did not continue trading right up to the cliff edge. Instead, he froze new transactions, protected assets, and handed the reins to an Administrator in an orderly way. While the original company still entered insolvency, the outcome for creditors (and for John’s own peace of mind) was far better than it would have been if he had delayed until the last penny had been spent.
If you’re a director reading this and feeling the pressure of financial distress, remember that you’re not alone and there is no shame in seeking help. Insolvency practitioners and turnaround specialists have seen it all before. Their early involvement is often the difference between a managed resolution and a chaotic collapse. Moreover, engaging with your creditors constructively – perhaps by forming a plan and presenting it openly – can sometimes lead to their support. Creditors generally prefer a workout over a wipe-out.
Operating in the zone of insolvency is one of the toughest challenges a director can face. It’s a twilight zone where your usual business instincts must adapt to a new reality: your duty is to minimise losses, not chase profits. As we saw with John’s story (and the cautionary tale of BHS), the stakes are high. Yet, by staying calm, informed, and proactive, you can navigate these troubled waters.
In summary, when financial distress hits: acknowledge it early, shift your focus to creditors’ interests, take decisive and well-informed action, and avoid the temptations that lead to personal liability (denial, delay, and reckless gambles). The law in England and Wales provides a framework – albeit a strict one – that essentially asks directors to be honest stewards for the creditors when times are dire. If you fulfil that role diligently, you greatly increase your chances of emerging on the other side with your reputation intact and without personal financial ruin.
Finally, always remember to get professional advice and do so sooner rather than later. An hour of consultation early on could save you from years of legal battles down the line. The zone of insolvency is not a place any director wants to be, but if you find yourself there, arm yourself with knowledge, surround yourself with good advisors, and act with integrity. By doing so, you’ll not only be doing right by your creditors and employees, you’ll also be protecting yourself. In the end, the goal is to turn around the ship if possible or at least ensure a controlled docking rather than a shipwreck. Directors who operate with care and foresight in this twilight zone can sleep a little easier, knowing they did all they could in the face of adversity. Stay responsible, stay informed, and don’t hesitate to reach out for that lifeline when you need it. Your future self (and your creditors) will thank you.
