Director obligations during company financial distress

The duty itself

A director must act in the way most likely to promote the success of the company for the benefit of its members as a whole. As a company moves into financial difficulty, the interests of creditors gain weight, and the point at which they become paramount is when insolvency is imminent or probable.

That shift does not create a new set of written rules. It changes how the existing duty is applied, which is why the board's reasoning at the time — recorded in minutes — is usually the central evidence in any later claim.

Wrongful trading

A director can be ordered to contribute to the company's assets if, before the start of insolvent liquidation, they knew or ought to have concluded that there was no reasonable prospect of avoiding it, and continued trading anyway. The defence is straightforward in principle and hard in practice: take every step a reasonably diligent director would take to minimise loss to creditors.

Seeking professional advice, acting on it, and documenting the analysis is what that defence looks like. Continuing to trade on hope, without a plan, is what it looks like when it fails.

Payments that can be reversed

Insolvency practitioners review the period before insolvency closely. Two categories of transaction come up repeatedly.

• Preferences: paying one creditor ahead of others, particularly connected parties such as a director's own loan account, within the relevant look-back period.
• Transactions at an undervalue: transferring assets, including property or intellectual property, for less than their worth.
• Dividends or drawings taken when the company was not in a position to declare them.

Records and reporting

Statutory records, management accounts and a rolling cash flow forecast are not paperwork for its own sake. Where records are missing, the practitioner and the court tend to assume the director knew more about the position than they claim.

What to do, in order

Hold a board meeting and minute it. Prepare a thirteen-week cash flow. Stop non-essential payments and do not pay connected parties ahead of others. Take advice from an insolvency practitioner and, separately, from solicitors on your own position, because those are different questions and sometimes different interests.

Consider the formal options — a company voluntary arrangement, administration, or a creditors' voluntary liquidation — while there is still value to preserve. Directors who appoint early are rarely the ones who end up in disqualification proceedings.

Disqualification risk

Disqualification follows unfit conduct, not simply failure. Trading while insolvent, failing to keep records, and ignoring advice are the recurring themes. A disqualification period restricts acting as a director and can reach fifteen years in serious cases.