When a company faces financial distress, “insolvency” can sound like the end of the road. But for directors, it’s also the start of a complex legal and procedural process that determines not just what happens to the business, but what happens to you personally.
At Director Guard, we help company directors across England and Wales understand and navigate this process, ensuring they’re informed, protected, and prepared at every stage.
This guide breaks down what actually happens when a company becomes insolvent, what directors should expect, and the key steps you can take to safeguard your position.
Step 1: Recognising Insolvency
Insolvency occurs when a company can’t pay its debts as they fall due or when its liabilities outweigh its assets.
As a director, it’s your legal duty to recognise these warning signs early. Common indicators include:
- Persistent cashflow problems
- Missed tax or supplier payments
- Overdue payroll obligations
- Pressure from creditors or winding-up threats
Failing to act once insolvency is apparent can expose directors to wrongful trading or misfeasance claims later on.
Step 2: Seeking Professional Advice
Once you suspect insolvency, your duty shifts, from acting in the best interests of shareholders to acting in the best interests of creditors.
At this point, seeking professional advice is vital. Insolvency practitioners (IPs), accountants, and specialist advisors like Director Guard can help you assess options such as:
- Company Voluntary Arrangement (CVA)
- Administration (rescue or restructuring)
- Creditors’ Voluntary Liquidation (CVL)
- Compulsory liquidation
Getting early advice can often reduce your personal risk and even create opportunities to restructure or save parts of the business.
Step 3: The Role of the Insolvency Practitioner
If formal insolvency proceedings begin, a licensed Insolvency Practitioner is appointed to take control of the company.
Their role is to:
- Collect and realise the company’s assets
- Investigate the company’s affairs and director conduct
- Distribute proceeds to creditors in order of legal priority
Importantly, they are required by law to submit a director conduct report to the Insolvency Service, even if no wrongdoing is suspected.
This is often where directors first encounter personal scrutiny.
Step 4: Director Investigations and Claims
Following liquidation or administration, the insolvency practitioner will review the company’s history, decisions, and records to determine whether directors may be personally liable for losses.
Common allegations include:
- Wrongful trading: continuing to trade when insolvency was unavoidable
- Misfeasance: misapplying company funds or breaching duties
- Preferences or transactions at undervalue: favouring certain creditors or transferring assets below market value
If an IP believes such actions occurred, they can pursue civil claims directly against directors to recover money for creditors.
Step 5: Defending Your Position
Even diligent directors can find themselves accused of breaches during insolvency. In many cases, these allegations can be successfully defended with the right preparation and expert support.
Key defences include:
- Demonstrating that you took every reasonable step to minimise losses to creditors
- Maintaining accurate financial records and board minutes
- Showing reliance on professional advice or reasonable business judgment
At Director Guard, we help directors respond to investigations, prepare defence strategies, and negotiate settlements, ensuring your actions are fairly represented and your rights are protected.
Step 6: Moving Forward with Confidence
While insolvency can be daunting, it doesn’t have to define your career or reputation. Many directors go on to run successful businesses again, provided they take swift, informed action when financial difficulties arise.
The key is to act early, document decisions, and seek specialist guidance before matters escalate.
How Director Guard Can Help
We specialise in supporting company directors across England and Wales facing scrutiny from insolvency practitioners. Whether you’re anticipating potential claims or already under investigation, our consultants can help you:
- Assess your personal exposure
- Build a robust defence strategy
- Negotiate realistic outcomes and settlements
If your company is entering or has entered insolvency, don’t wait for a claim to arrive — reach out to Director Guard for confidential, expert advice on how to protect your position