Guide summary

Ask a licensed insolvency practitioner for advice as soon as you have doubts, and keep their advice on file
Keep up-to-date management accounts, a cash flow forecast and a list of what each creditor is owed
Record in board minutes each discussion on paying debts, the options considered and the decisions made
Note who was paid and why, and what each asset was sold for, to show creditors were treated fairly
A liquidator can challenge a preference to an unconnected person made in the 6 months before insolvency
A liquidator can challenge a transaction at undervalue or a preference to a connected person from 2 years before
To defend wrongful trading, show you took every step you ought to have taken to minimise loss to creditors
Fraudulent trading can mean up to 10 years in prison and/or an unlimited fine

A limited company protects its directors from its debts, but not in every case. Once the company is insolvent, or insolvent liquidation is likely, the law expects you to protect what is left for creditors as a whole. If the company then goes into liquidation or administration, the insolvency practitioner looks back at what you did and can ask the court to make you pay.

Directors' duties upon insolvency

Shift from shareholder to creditor interests with 5 key responsibilities.

When a company becomes insolvent, directors' duties shift from promoting success for shareholders (Companies Act 2006 s.172) to protecting creditors' interests (common law duty established in West Mercia Safetywear Ltd v Dodd [1988]).

Insolvency definition (cash flow test): Company unable to pay debts as they fall due (Insolvency Act 1986 s.123(1)(e))
Insolvency definition (balance sheet test): Liabilities exceed assets, taking into account contingent and prospective liabilities (s.123(2))
Duty shift: From shareholders' benefit to creditors' interests

5 key responsibilities when insolvent

Protect company assets - Prevent asset dissipation, avoid preferential payments to some creditors, don't dispose of assets below value
Treat all creditors equally - Cannot prioritise one unsecured creditor over another (unless legal priority), avoid "preferences" (paying friendly creditor ahead of others)
Prevent deterioration - Don't incur new debts company cannot pay, avoid increasing creditor losses, consider whether continuing to trade worsens position
Seek professional advice - Consult licensed insolvency practitioner, consider all rescue and insolvency options, document decisions and advice received
Maintain proper records - Keep accounting records up to date, preserve books and records, file statutory returns at Companies House

Personal liability exceptions

Directors generally NOT personally liable (company is separate legal entity, "limited liability" principle protects directors and shareholders).

Exceptions - personal liability CAN arise:

Wrongful trading (s.214 Insolvency Act 1986)
Fraudulent trading (s.213 Insolvency Act 1986)
Misfeasance (breach of duty)
Compensation orders (court-ordered for misconduct)
Personal guarantees (if directors have given guarantees for company debts)
Fraudulent preference (preferring connected parties)
Transactions at undervalue (selling assets below value to defeat creditors)

Director disqualification period: 2 to 15 years (if Secretary of State applies for disqualification order)
Investigation period: Last 3 years of directors' tenure

Director duties upon insolvency - GOV.UK (opens in a new tab)

Transactions a liquidator can undo

Antecedent transaction look-back periods

Look-back periods for preferences and transactions at undervalue under Insolvency Act 1986 s.238-240.

Liquidators and administrators can challenge certain transactions made before insolvency. The "relevant time" varies by transaction type and whether connected persons were involved.

Transactions at undervalue: 2 years before onset of insolvency
Preferences (connected persons): 2 years before onset of insolvency
Preferences (unconnected persons): 6 months before onset of insolvency
Transactions defrauding creditors (s.423): No time limit
Extortionate credit transactions: 3 years before administration/liquidation

Transaction at undervalue (s.238)

Company:

Made a gift or received no consideration, OR
Received consideration of significantly less value than provided

Defence: Company acted in good faith, for purpose of carrying on business, with reasonable grounds to believe transaction would benefit company.

Preferences (s.239)

Company did anything putting a creditor in better position than in liquidation. Must prove company was "influenced by desire to prefer" (presumed for connected persons).

Connected persons

Directors and shadow directors
Associates of directors (family, business partners)
Companies under common control

Wrongful trading

If you knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation or administration, and you carried on, the court can order you to contribute to the company's assets. Your defence is to show that from that point you took every step you ought to have taken to minimise the potential loss to creditors. Shadow directors are covered too.

Fraudulent trading

Fraudulent trading liability (IA 1986 s.213 civil; CA 2006 s.993 criminal)

Civil contribution order under Insolvency Act 1986 s.213 against anyone knowingly party to carrying on business with intent to defraud creditors. The same conduct is separately a criminal offence, with unlimited personal liability, under Companies Act 2006 s.993 (not s.213 itself).

Fraudulent trading (Insolvency Act 1986 s.213) is a serious offence where business is carried on with intent to defraud creditors. Unlike wrongful trading, it requires proof of dishonest intent and carries criminal penalties.

Legal basis: Insolvency Act 1986, s.213 (civil), Companies Act 2006 s.993 (criminal)
Status: Both civil AND criminal offence
Mental element required: Intent to defraud (actual dishonesty must be proved)
Who is liable: Any person knowingly party to fraudulent trading (not limited to directors)
Criminal penalty (CA 2006 s.993): Up to 10 years imprisonment and/or unlimited fine
Civil remedy (IA 1986 s.213): Personal contribution to company assets as court thinks proper

Elements of fraudulent trading

The liquidator must prove:

Business of the company was carried on with intent to defraud creditors of the company
OR intent to defraud creditors of any other person
OR for any fraudulent purpose

Key features:

Actual dishonesty required (not merely negligence)
Intent to defraud must be proved to criminal standard for s.993 prosecution
Civil standard (balance of probabilities) for s.213 contribution order
No defence available once intent proven

Distinction from wrongful trading (s.214)

Feature	Fraudulent (s.213)	Wrongful (s.214)
Mental element	Intent to defraud (dishonesty)	Knew or ought to have known
Who liable	Anyone knowingly party	Directors/shadow directors only
Criminal liability	Yes (up to 10 years)	No
Defence available	No	Yes ("every step" defence)
Standard of proof	Criminal for s.993	Civil only

Current financial information

Keep up-to-date management accounts, a cash flow forecast and a list of creditors with what each is owed.
Board minutes

Record each board discussion about whether the company can pay its debts, the options considered and the decisions made.
Written insolvency advice

Ask a licensed insolvency practitioner for advice as soon as you have doubts, and keep their advice on file.
A record of payments and asset sales

Note who was paid and why, and what each asset was sold for, so you can show creditors were treated fairly.

Legal basis

Primary legislation and key regulations

Companies Act 2006 Primary 2006 · UK-wide Company Directors Disqualification Act 1986 Primary 1986 · UK-wide Insolvency Act 1986 Primary 1986 · UK-wide

Browse UK legislation legislation.gov.uk

Official guidance

Liquidating your company (opens in a new tab)

GOV.UK · England and Wales

Protect creditors as a director of an insolvent company

Transactions a liquidator can undo

Wrongful trading

Fraudulent trading

Current financial information

Board minutes

Written insolvency advice

A record of payments and asset sales

Legal basis

Official guidance

Related guides in Compliance & Legal

Choose a company rescue or insolvency procedure

Avoid wrongful trading as a company director

Understand director disqualification

Check before appointing company directors

Conduct business acquisition due diligence