A director's guide to company insolvency
When your company is in financial difficulty, the law expects something specific of you as a director, and understanding it early is the best protection you have. The central rule is that once a company is, or is likely to become, insolvent, your duty shifts from acting in the interests of shareholders to acting in the interests of creditors as a whole. This guide explains what insolvency actually means, the two legal tests, the rescue and closure options open to you, and the specific situations, personal guarantees, overdrawn loan accounts, wrongful trading, that can make a director personally liable. The recurring message is that acting promptly and taking advice from a Licensed Insolvency Practitioner gives you more options and less personal risk than carrying on hoping things improve. Most directors are not personally liable for company debts, but the exceptions matter, and they are easier to manage early. Insolvency Service, gov.uk
What insolvency means
A company is insolvent if it fails either the cash-flow test (it cannot pay its debts as they fall due) or the balance-sheet test (its liabilities exceed its assets). You can check both with our insolvency test tool. Insolvency is not the end of the road, but it is the point at which your legal duties change.
Your duties change at insolvency
Once the company is insolvent or likely to become so, you must put creditors first. That means not preferring some creditors over others, not taking unlawful dividends, and not running up debts you cannot repay. Doing so risks claims for wrongful trading and personal liability.
Your options
If the business is viable, administration or a CVA may rescue it. If it is not, a CVL is the controlled close. If the company is solvent, a strike off or MVL may fit. Compare them on our options table.
Where you can be personally liable
The main exceptions are a personal guarantee, an overdrawn director loan account, wrongful trading, and misused Bounce Back Loans. Each is manageable if dealt with early. See am I personally liable for company debts? for the full picture.
Common questions
Am I personally liable for my company's debts?
Usually not. Company debts belong to the company. The exceptions are personal guarantees, an overdrawn director loan account, wrongful trading and misused Bounce Back Loans. Early advice helps you manage these.
When should a director get insolvency advice?
As soon as the company may not be able to pay its debts. Acting early, at the cash-flow-problem stage, keeps the most options open and is the strongest protection against personal liability claims.
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