Director duties when a company is in financial difficulty

Section 170 onwards Companies Act 2006 codifies the principal duties every director owes. The seven sections below are the framework — they apply equally to a sole director of a small company and a board member of a FTSE 100 plc.

In normal company circumstances, these duties run primarily for the benefit of the members (shareholders). When the company is solvent and trading well, the director's job is to grow value for shareholders within the framework of the section 170 duties.

When the company enters financial difficulty, the framework shifts. Section 172(3) Companies Act 2006 specifically provides that the duty to promote the success of the company has effect “subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”. The “enactments and rules of law” referenced include the wrongful trading and misfeasance provisions of the Insolvency Act 1986, and the developing common-law principle that creditor interests rise in priority as the company approaches insolvency.

BTI 2014 LLC v Sequana SA [2022] UKSC 25 is the leading modern authority on when creditor interests start to matter. The Supreme Court confirmed that the duty in section 172(3) is engaged when the directors know or should know that the company is or is likely to become insolvent, or that an insolvent liquidation or administration is probable. The duty becomes more demanding the closer the company is to insolvency — a sliding scale rather than a binary switch.

The Sequana decision did not introduce a new duty — it clarified existing principles. But the clarification has been influential: insolvency practitioners and litigation funders increasingly review pre-insolvency director conduct against the Sequana framework, and successful section 212 IA 1986 misfeasance claims are more frequent.

Section 214 IA 1986 creates personal liability for directors who continue trading when they “knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation” — and did not take “every step with a view to minimising the potential loss to the company's creditors”.

The two-part test

First, did the director know (or should they have known) that insolvent liquidation was inevitable? This is judged by reference to: (a) what a reasonably diligent director with the directors' actual knowledge would have known; and (b) what a director of that company should reasonably have been expected to know. Second, having reached that point, did the director take every step to minimise creditor loss?

If both tests are answered against the director, the court can order them to make “such contribution to the company's assets as the court thinks proper” — in practice, the increase in net deficiency to creditors caused by the continuation of trading after the relevant date. For directors of small companies, wrongful trading claims can be substantial — personal liabilities of £50,000–£500,000+ are common where trading continued for some months after the wrongful trading point.

Three protections

• ›The 'every step' defence — directors who can demonstrate they took genuine steps to minimise creditor loss (e.g. reducing trading, ceasing new credit, taking professional advice, planning insolvency procedure) can defeat the claim even where they continued trading.
• ›The objectively-reasonable approach to ongoing trading — sometimes continuing to trade for a defined period to achieve an orderly close-down (e.g. completing a contract that funds the cessation, achieving a sale of the business) produces less creditor loss than immediate cessation. Directors taking this approach should document the reasoning.
• ›Section 1157 Companies Act 2006 relief — the court has discretion to relieve a director from liability where the director 'has acted honestly and reasonably' and 'ought fairly to be excused'. This is a high bar but it does exist.

For the deeper technical analysis, see Wrongful Trading.

Section 212 IA 1986 allows a liquidator (or administrator) to bring proceedings against a director for “misfeasance or breach of fiduciary or other duty in relation to the company”. The section is procedural — it does not create new duties but provides a statutory route to enforce existing duties in insolvency proceedings.

Section 246ZB (extortionate credit transactions) is a related provision allowing the court to set aside or vary credit transactions entered into during the two years before insolvency where the terms of credit were “extortionate”. Used relatively rarely but can apply where a director caused the company to take credit on unfavourable terms (e.g. a director loan on terms favourable to the director and unfavourable to the company).

Common targets of misfeasance claims

• ›Director loan accounts — where the director's drawings exceed dividend approval and salary, the overdraft is a debt to the company. Liquidators routinely pursue these. See DLA s.455 for the section 455 CTA 2010 tax dimension.
• ›Preferences — payments made to particular creditors (often the director themselves, or a connected party) within the six months before insolvency that prefer that creditor over others. Section 239 IA 1986.
• ›Transactions at undervalue — asset transfers within the two years before insolvency for less than market value. Section 238 IA 1986.
• ›Connected-party transactions — sales of assets to family members or connected companies at favourable prices.
• ›Dividends paid when the company was insolvent or close to insolvency — distributable reserves test fails retrospectively.

The protective response to misfeasance risk is record-keeping. Directors who can demonstrate they considered creditor interests, took advice, and acted reasonably are materially better-positioned than directors who cannot.

Beyond personal-liability claims, directors of insolvent companies face the possibility of disqualification proceedings under the Company Directors Disqualification Act 1986. The Insolvency Service investigates director conduct in every CVL, administration, and compulsory liquidation — section 7A CDDA 1986 imposes a duty on insolvency practitioners to report unfit conduct to the Secretary of State.

Conduct that commonly triggers disqualification proceedings

• ›Allowing the company to trade while insolvent (Crown debt accumulation is a common factor)
• ›Failure to maintain proper accounting records
• ›Failure to comply with directors' statutory obligations (filing, accounts, tax)
• ›Misfeasance or breach of fiduciary duty
• ›Connected-party transactions to the detriment of creditors
• ›Failure to cooperate with the office holder

Disqualification periods range from 2 to 15 years. Section 9A CDDA 1986 disqualification undertakings (where the director admits unfit conduct and accepts disqualification) are increasingly common — they avoid the cost and uncertainty of formal proceedings but produce the same outcome. A disqualified director cannot be a director or take part in the management of any company during the disqualification period — breach is a criminal offence.

The practical protections against disqualification are essentially the same as the protections against personal liability: timely action, honest record-keeping, taking advice, cooperation with the office holder. Directors who behave reasonably and engage with the IP rarely face disqualification — even if the company has failed.

If your company is in financial difficulty, the steps below materially improve your personal position. None of them are complex; collectively they create the documentary record that supports a section 1157 relief argument and demonstrates reasonable conduct.

Section 1157 Companies Act 2006 provides:

This is the key statutory relief power for directors facing personal-liability claims. The bar is high — the director must demonstrate honest and reasonable conduct, and the court must conclude that fairness supports relief. But it is not impossible. Directors who took advice, kept records, made decisions honestly and reasonably, and cooperated with the office holder are the candidates for section 1157 relief.

The protective steps in the previous section all support a section 1157 argument. Directors who can show: “I took advice from a Licensed Insolvency Practitioner; I held and minuted board meetings; I stopped incurring credit when I should have; I treated all creditors fairly; I engaged with HMRC; I documented what I was doing; I cooperated with the office holder” — those directors have the documentary basis for section 1157 relief if a personal-liability claim is brought against them.

There is no perfect moment to take advice. The question is whether the warning signs are present. The principal warning signs:

Our typical first conversation with a director facing this question is 30–60 minutes. We are not your solicitor, we are not your accountant — we are an Insolvency Practitioner. The conversation typically covers:

• ›Honest evaluation of the company position — is it solvent, doubtful, or insolvent?
• ›Identification of the principal personal-exposure risks — wrongful trading, misfeasance, disqualification, personal guarantees
• ›Practical steps that improve the director's position — the points in the previous section
• ›Procedural options if formal action becomes necessary — administration, CVL, MVL
• ›Realistic assessment of timing — how urgent is action?

We are happy to have this conversation without any commitment to formal procedure. Many directors come to us thinking the answer is liquidation and leave with practical steps to improve the company position — the conversation does not always end in our appointment. Where action is needed, we explain the options honestly and let the director decide.

If you want the deeper wrongful trading framework: see Wrongful Trading.

If you are evaluating procedural options: see Administration vs CVL.

If your concern is HMRC pressure specifically: see HMRC Distraint, HMRC Security, HMRC Field Force, or TTP Forecast.

If your concern is personal guarantees being called: this is a related but distinct topic — the personal guarantee operates regardless of the director duty framework, and triggering events are usually creditor enforcement under the guarantee.

If you want to talk it through: book a free 30–60 minute conversation with Simon at the Contact page or call 020 8153 1270. There is no obligation — the call is genuinely free.

Director-duty conversations work best when had early. The protective steps in this spoke are most valuable before personal-liability claims have been brought — once an office holder is investigating, the framework shifts from prevention to defence. Free initial conversation. Honest evaluation. No obligation.