What directors should do
If your company is teetering on the brink like John’s, don’t panic – act! Here are some proactive steps and best practices for directors operating in the zone of insolvency:
- Face reality and engage early: Acknowledge the financial problems instead of denying them. Convene a board meeting specifically to discuss the cash flow and solvency outlook. John did exactly this when he saw trouble, he gathered his team and put the issue on the table. Early recognition gives you more options to save the business or soften the landing.
- Prioritise creditor interests in decisions: Shift your mindset from growth and profit to preservation of value for creditors. This doesn’t mean you must shut down immediately, but it does mean any major decision should be evaluated for its impact on creditors. Document in meeting minutes that the board considered creditors’ interests. This paper trail can be crucial later to show you tried to do the right thing. For instance, if you decide to continue trading for a short period, be sure you can justify how this avoids or reduces harm to creditors (maybe you’re completing an almost-finished project to generate cash that will partly repay them). If the plan is too risky and could deepen losses, don’t do it.
- Protect company assets: Make sure the company’s assets are safeguarded and not improperly siphoned off. In practice, this means no selling assets at an undervalue (e.g., don’t sell the company van to your cousin for £1) and no hiding assets. Tighten up any loose controls, ensure stock isn’t going missing and cash isn’t being spent on non-essentials. The Insolvency Service explicitly warns that directors in insolvency must protect any assets the company has. Those assets might be the only thing left to satisfy creditors, so treat them as practically held in trust.
- Treat all creditors fairly: When money is tight, the squeakiest wheel often gets the oil but be very careful. Do not favour one creditor over another without proper justification. Paying off only a particular friendly creditor (or say, a supplier who’s pressuring you aggressively) while others get nothing can be later challenged as a preference. The law expects you to treat all creditors the same in the zone of insolvency. There are exceptions (for example, paying off a creditor who could push you into liquidation immediately might buy time, but such moves should only be done with professional advice). Generally, avoid any hint of favouritism or insider deals.
- Avoid worsening the creditors’ position: This is a fundamental rule: don’t make the hole deeper. In John’s case, he had to consider whether taking a new high-interest loan to keep the lights on would just lead to bigger losses for everyone later. Directors must ensure they do not worsen the financial position of creditors. In practice, this means don’t incur new debts you have no realistic way of paying. If you order £100k in new inventory knowing full well the company can’t pay for it next month, you’re worsening the outcome for creditors (and that could be wrongful trading). Instead, focus on reducing expenses, pausing projects, and preserving cash.
- Seek professional advice early: One of the best moves a director can make in distress is to call in qualified help. This could be an insolvency practitioner (IP) or a turnaround advisor or an experienced restructuring lawyer. They can provide an objective view of the company’s solvency and advise on rescue options. In the UK, directors are obliged to consult with or consider appointing an insolvency practitioner as insolvency looms. Professionals might suggest a restructuring plan, Company Voluntary Arrangement (CVA), or Administration to protect the business and creditors. John, for example, decided to bring in an IP who helped him assess whether a formal Administration could save parts of the business. Remember, getting advice is not a sign of failure – it’s a sign of responsibility. As the Insolvency Service notes, if you’re unsure about what to do, seek professional advice. It’s far better to have experts guide you than to blunder into the legal minefield alone.
- Keep detailed records and be transparent: Maintain full transparency with your board and advisors about the financial state of affairs. Keep minutes of meetings where financial decisions are made. Preserve emails or documents showing you’ve warned fellow directors of the situation. These records might later demonstrate that you acted prudently. Also, continue to file any required documents (like tax returns or annual accounts) on time if possible, showing that you didn’t just abandon your duties. Transparency extends to creditors too: while you shouldn’t unilaterally declare insolvency to all stakeholders without a plan, it can be wise (with advice) to open dialogues with key creditors about stretching payments or restructuring debts. They may be more cooperative than you expect if they see you’re acting in good faith.
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.
The information provided in this article is for general information purposes only and does not constitute legal advice. Whilst we endeavour to ensure that the content is accurate and up to date, it may not reflect the most recent legal or regulatory developments related to insolvency. Accordingly, nothing in this article should be relied upon as a substitute for professional advice tailored to your specific circumstances and no liability will be accepted from you acting or refraining from acting in relation to any information provided in this article. Should you require specific insolvency advice please contact us.
