Running a limited company in financial difficulty is stressful, and many directors are not aware that their legal duties change as the situation becomes more serious. Understanding this early can prevent personal liability further down the line.
Your duties when trading normally
Under the Companies Act 2006, directors owe their primary duties to the company and, through it, to shareholders. These include acting within powers, exercising reasonable care and skill, promoting the success of the company, and avoiding conflicts of interest.
How duties shift under financial pressure
Once a company is approaching insolvency — or is insolvent — the law requires directors to give increasing weight to the interests of creditors, not just shareholders. This is not a cliff edge; it is a gradual shift that begins when you know or should reasonably know there is a real risk the company cannot pay its debts. In practical terms, this means:
- Do not pay dividends or return value to shareholders when creditors are unpaid
- Do not sell company assets at undervalue to connected parties
- Do not take on new credit obligations you have no realistic prospect of repaying
- Keep good records of every decision you make and why
Wrongful trading and misfeasance
If a company does become insolvent and is later wound up, an insolvency practitioner may review director conduct. Wrongful trading — continuing to trade and accumulate debt when you knew or should have known there was no reasonable prospect of avoiding insolvent liquidation — can result in personal liability. Taking prompt advice, documenting decisions, and not drawing excessive remuneration are all protective steps.
We lend only to UK limited companies and LLPs, and the loan is to the company with no director personal guarantee. As business finance outside the consumer-credit regime, it is not covered by the Financial Ombudsman Service or FSCS.
See also: The difference between insolvency and a cashflow gap, Where to get free business debt advice.