When external shocks — not director conduct — cause company failure

The position on instruction

Not every company that enters insolvency does so because of director error. A meaningful proportion of appointments handled by IQ Insolvency involve businesses where the trading model was sound, the management was competent, and the financial controls were appropriate — but where an external shock made continued trading impossible. This case study draws on three such appointments to illustrate the pattern.

The first underlying case concerned a film and television scenic painting business operating since 2010. Its director was a recognised name in theatre and screen design with a 30-year career. The company traded profitably through the 2010s and built reserves sufficient to absorb the COVID-19 disruption. A bounce-back loan was taken in 2020 and an overdraft used to maintain tax compliance during the pandemic; both were on track for repayment under a five-year plan.

The second case involved a property special-purpose vehicle (SPV) LLP that had completed a residential conversion of a Central London office building in 2014. The 28-flat development was sold profitably and funds distributed to members. In 2016, HMRC began investigating the stamp duty scheme used at acquisition — a scheme that had been considered legally compliant at the time and was widely used across the property market.

The third case concerned a management consultancy providing HR services to a single dominant client — a PAYE umbrella company that had grown to dominate the consultancy's order book. The relationship was profitable and the consultancy had appropriate trading terms.

In each case, an external shock changed the position fundamentally.

The analysis

For the scenic painting business, the shock was the 2023 US writers' and actors' strikes. UK film and television production — which had become substantially dependent on US-funded projects — largely halted for 18 months. The company maintained tax compliance by drawing the overdraft to its maximum, by the director remortgaging the family home, and by the director cashing in personal pensions. By early 2025 it became clear that no level of further personal investment could close the gap; recovery was not viable on any reasonable projection.

For the property SPV, the shock was retrospective. After eight years of HMRC investigation and dependent test cases that ultimately failed in 2024, the LLP was determined to owe £1.1m in stamp duty including accrued interest and penalties. The SPV had long since distributed its funds to members and had no resources to meet the assessment. The members had acted in good faith throughout, in reliance on professional tax advice from counsel and a leading accountancy firm at the time of the original transaction.

For the consultancy, the shock was their single dominant client entering compulsory liquidation in 2024 following an HMRC petition. The unpaid invoice balance was substantial. The consultancy director's attempts to diversify the client base were interrupted by a serious health diagnosis that took the director out of active management. With one creditor (the failed client's appointed liquidators) holding the only material claim and no realistic prospect of replacement trading, the consultancy could not continue.

The strategy adopted

In each case, the strategy was framed around three points:

1. 01Confirming honestly that the business could not be rescued. Where viability is genuinely absent, recommending CVA or administration would have produced wasted cost and worse outcomes.
2. 02Protecting the director's personal position — in particular ensuring that conduct investigations under SIP 2 would record the absence of fault and that no CDDA referral would arise. In each case, the external causation was the central narrative for those investigations.
3. 03Where directors had made personal sacrifices (remortgaging, pension drawdowns) to support the company, ensuring those sacrifices were recorded in the SIP 6 narrative for transparency with creditors. This matters both for creditor relations and for HMRC's secondary preferential analysis — where directors have already drawn personal funds in good-faith attempts to meet tax obligations, the regulatory position is materially different from cases of neglect.

Execution

Each appointment was taken via the Creditors Voluntary Liquidation route. The procedural steps were standard — statement of affairs, s.100 IA 1986 creditor decision procedure, notifications to HMRC and creditors. The substantive work was in the conduct narrative and the creditor communications.

For the scenic painting business, the SIP 6 narrative documented the industry timeline (strikes, project cancellations, the specific UK production studios affected), the director's response (overdraft drawdown, remortgage, pension cash-in), and the rationale for instructing only when those resources were exhausted. The narrative supported a conduct finding that recorded no concerns warranting CDDA action.

For the property SPV, the SIP 6 narrative documented the test case timeline, the test case outcomes, the original professional advice and the reasonableness of reliance on it. HMRC engaged with the appointment on the basis that the LLP had no realisable assets; the assessment ranked as an ordinary unsecured claim in the liquidation.

For the consultancy, the SIP 6 narrative documented the single-client concentration risk, the actions taken to diversify (subsequently interrupted by the director's illness), and the precipitating cause — the customer's own insolvency. The matter closed without conduct concerns.

The outcome

Each liquidation completed within twelve to fifteen months. Recoveries to unsecured creditors were modest in each case — reflecting the asset position rather than any procedural shortcoming. In each case, the director avoided CDDA referral, avoided personal liability findings beyond what they had voluntarily contributed, and was free to continue their professional career in a different vehicle.

The point of these case studies is not procedural; CVL was relatively straightforward in each case. The point is that genuine no-fault insolvency exists, and the procedural and reputational outcomes available to a director in that position depend critically on how the matter is investigated, recorded and communicated.

Takeaways for directors in similar positions

• ›External causation does not insulate a director from insolvency — but it does materially change the regulatory position. Conduct investigations, CDDA exposure and HMRC engagement all turn on the underlying cause.
• ›Where directors have made personal sacrifices to support the company before instruction, those sacrifices should be documented and communicated to creditors and the regulator. They evidence the absence of fault.
• ›Single-client concentration risk is a structural exposure that frequently crystallises only at the point of crisis. Directors managing concentrated trade should consider mitigation — diversification, security, factoring — long before any sign of difficulty.
• ›Where the cause of insolvency is genuinely external, professional advice should still be taken promptly. Delay where assets are being eroded only narrows the procedural options.