When a company becomes insolvent or is close to it, directors face a set of legal duties and personal risks that are very different from normal trading. This article explains how to recognise when a company is insolvent or it is likely, what duties change, what actions can increase or reduce personal exposure, and what practical steps directors should take before speaking to a Licensed Insolvency Practitioner. It also sets the current position in context, using recent R3 data and the OBR’s outlook for 2026, to show why many companies are facing financial pressure and why early action matters.
What does the current insolvency landscape look like?
R3’s analysis of 2025 shows that corporate insolvency activity remained high, with 28,616 corporate insolvency‑related activities recorded in 2025, only slightly below 2024 and still well above pre‑pandemic levels. R3 notes that SMEs in particular continued to face sustained pressure from higher costs, tighter credit and weak demand.
The Office of Budget Responsibility’s November 2025 Economic and Fiscal Outlook indicates that UK growth is expected to remain weak through 2026, with limited signs of a strong recovery. This suggests that directors should not assume that trading conditions will improve quickly.
This backdrop explains why more directors are encountering cash flow stress, creditor pressure and uncertainty about their duties.
What are the signs that a company is insolvent?
In our experience, directors – especially in the SME sector – rarely identify the risk of insolvency through formal tests alone. In practice, they notice warning signs such as:
- difficulty paying suppliers, HMRC or lenders on time
- reliance on short‑term borrowing to manage cash
- creditor threats or legal action
- pressure from landlords or finance providers
- reduced access to trade credit
The two commonly used indicators of insolvency are:
- Cash flow insolvency
When the company cannot pay debts as they fall due. - Balance sheet insolvency
When liabilities exceed assets.
Recognising these signs early is one of the most effective ways to protect both the business and the directors personally.
What actions should a director take if insolvency becomes likely?
When a company is solvent, directors must act in the interests of shareholders.
When insolvency becomes likely, directors must give greater weight to the interests of creditors.
In practice, this means:
- avoiding actions that worsen creditor outcomes
- ensuring decisions are properly recorded
- avoiding selective payments
- avoiding new commitments the company cannot meet
- seeking professional advice promptly
This shift does not automatically require trading to stop, but it does require directors to ensure that any continued trading does not increase losses to creditors.
What risks do directors face if a company is insolvent?
Directors often worry about personal exposure. The main risks include:
- Wrongful Trading
Continuing to trade when directors knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation or administration. - Fraudulent Trading. Fraudulent trading arises if a debt was incurred when the directors knew that there was little prospect of the debt ever being paid or indeed where there was no prospect of it being paid within a reasonable time of it falling due
- Preferences
Paying one creditor in a way that puts them in a better position than others. - Transactions at undervalue
Selling assets for less than their true value.
Take a look at our video that explains the duties of directors at insolvency
- Personal guarantees
These can crystallise if the company cannot meet its obligations.
These risks are more manageable when directors act early, keep clear records and seek advice before making decisions that affect creditors.
What mistakes make things worse?
Under financial pressure, directors sometimes take steps that unintentionally increase risk. Common examples include:
- paying some creditors while ignoring others
- taking on personal loans to support the company
- continuing to trade without understanding the implications
- failing to keep board minutes or decision records
- delaying conversations with professional advisers
These behaviours can complicate the position for both the company and the directors.
What can directors safely do before taking insolvency advice?
There are practical steps directors can take that do not involve making decisions about creditor outcomes or the future of the business.
Directors can:
- gather up‑to‑date financial information
- ensure management accounts are up to date and accurate
- keep clear board minutes
- avoid taking on new credit
- avoid selective payments
- avoid new personal guarantees
- maintain open communication within the board of directors
Accountants can help prepare and clarify financial such information.
However, once insolvency is likely, only a licensed Insolvency Practitioner should advise on:
- whether trading can continue
- how directors’ duties have changed
- how to protect creditors
- how to protect directors personally
- which options may be appropriate
This boundary protects directors and ensures decisions are compliant.
What options are available if a company is insolvent?
If insolvency is likely or unavoidable, the main options include:
- Company voluntary arrangement (CVA)
A structured agreement with creditors. - Administration
A process designed to protect the business while options are assessed. - Liquidation
Bringing the company to an orderly end when rescue is not viable. The most common type is a Creditors’ Voluntary Liquidation - Informal restructuring
Negotiated arrangements with creditors outside a formal process.
A Licensed Insolvency Practitioner will explain which, if any, of these options are suitable, flowing a detailed investigation into a company’s finances.
What should directors facing financial difficulties prepare before speaking to an Insolvency Practitioner?
Directors do not need perfect information, but having the following ready helps the IP assess the situation quickly:
- recent management accounts
- aged creditor and debtor lists
- details of any legal actions or creditor pressure
- copies of finance agreements and guarantees
- cash flow information
- board minutes or key decisions
The first conversation is confidential and focused on understanding the position, not judging past decisions.
Insolvency is not failure, but taking early action is key
Many companies face financial pressure, especially in the current environment. Directors who act early, keep clear records and seek advice promptly protect themselves, their employees and their creditors.
Insolvency is a process, not a verdict.
The right steps at the right time can make a significant difference. Early action is key.
FAQs
Can I continue trading if my company is insolvent?
Possibly, but only if doing so does not worsen creditor outcomes. A licensed Insolvency Practitioner should advise on this.
Will I be personally liable for company debts?
Generally no, unless wrongful trading, personal guarantees or certain transactions apply. Early advice reduces risk.
Do I have to tell creditors immediately?
Directors should avoid misleading creditors. An IP can advise on how to manage communication safely.
Can I pay staff or HMRC first?
Selective payments can create risk. This should be discussed with an IP before action is taken.
When should I speak to an Insolvency Practitioner?
As soon as insolvency is likely or creditor pressure becomes unmanageable. Early engagement protects directors. Take a look at our free Insolvency and Restructuring guide.
