Directors' duties when insolvency is looming
When a UK company approaches insolvency, the directors' section 172 duty under the Companies Act 2006 shifts to give weight to creditors' interests. The Supreme Court fixed the trigger in BTI 2014 LLC v Sequana SA [2022] UKSC 25: the creditor duty engages when directors know — or ought to know — that insolvency is probable. Miss the shift and you risk personal liability under s.214 IA 1986 (wrongful trading), s.213 IA 1986 (fraudulent trading), and disqualification under the CDDA 1986. Author: Chris at Sell Ltd.
The Sequana trigger — plain English
Ordinary s.172 duty: promote the success of the company for the benefit of the members as a whole.
The 'shift' engages. Creditors' interests must be considered and given weight — increasing weight as insolvency becomes more likely.
Creditors' interests dominate. Directors must minimise loss to creditors; new credit and speculative trading create wrongful-trading risk.
The five things to do this week
Instruct a licensed insolvency practitioner (regulated by IPA, ICAEW or ACCA). Their initial view is usually free and creates a defensible paper trail from day one.
Hold a minuted board meeting. Record cash position, key creditor pressure, going-concern assumptions and the decision reached. This is your s.172(3) evidence.
Refresh management accounts and a rolling 13-week cash-flow forecast. Sensitise for a base and downside case. Save the workbook — courts and administrators ask for it later.
Freeze new credit you cannot repay. Do not accept large customer prepayments if delivery is doubtful — that is a classic wrongful-trading fact pattern.
Preserve HMRC and payroll obligations where possible. Late VAT/PAYE is normal in distress; ignoring them signals bad faith and can accelerate a winding-up petition.
Personal-liability boundaries
| Claim | Statutory basis | Standard | Remedy |
|---|---|---|---|
| Wrongful trading | s.214 IA 1986 | Reasonable diligence — objective | Contribution to assets |
| Fraudulent trading (civil) | s.213 IA 1986 | Intent to defraud creditors | Contribution to assets |
| Fraudulent trading (criminal) | s.993 CA 2006 | Intent to defraud, beyond reasonable doubt | Up to 10 years |
| Misfeasance | s.212 IA 1986 | Breach of duty / misapplication | Restore assets or compensate |
| Disqualification | CDDA 1986 s.6 | Conduct making unfit | 2–15 years |
| Preferences | s.239 IA 1986 | Desire to prefer + relevant time | Reversal / restitution |
Deeper reads
Frequently asked questions
When exactly do directors' duties shift from shareholders to creditors?
The Supreme Court settled this in BTI 2014 LLC v Sequana SA [2022] UKSC 25. The creditor duty engages when directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that insolvency is probable. Once engaged, section 172(3) of the Companies Act 2006 requires directors to consider — and give weight to — the interests of creditors as a whole.
Is 'creditor duty' a separate legal duty?
No. It is a modification of the section 172 CA 2006 duty to promote the success of the company. Directors still act 'for the benefit of the company', but the beneficial content shifts from members to creditors as the company approaches insolvency. Sequana confirmed there is no free-standing creditor duty owed to individual creditors.
What practical steps do directors need to take?
Take licensed insolvency advice immediately; hold minuted board meetings; stop taking on new credit you cannot repay; keep contemporaneous notes explaining every material decision; obtain up-to-date management accounts and cash forecasts; and be honest about the going-concern assessment. This paper trail is what defends a s.214 IA 1986 wrongful-trading claim later.
Can I still pay some creditors and not others?
Yes, but carefully. Paying one creditor at the expense of another can be a preference under section 239 of the Insolvency Act 1986 if the payment puts them in a better position than they would have been in on insolvent liquidation and it was influenced by a desire to prefer. Preferences to 'connected' parties (directors, family, group companies) attract a 2-year lookback and a presumption of preferential intent.
Am I personally liable if the company can't pay HMRC?
Only in specific circumstances. HMRC can issue a Personal Liability Notice (PLN) for unpaid NIC where deliberate neglect is proven. Since 2020, joint-and-several liability notices under Schedule 13 of the Finance Act 2020 can be issued for VAT/PAYE where directors received a tax advantage from insolvency-related conduct. Ordinary trading debt to HMRC is not personal.
What happens if I keep trading past the point of no return?
You risk personal liability under section 214 (wrongful trading) IA 1986 — the court can order you to contribute personally to the company's assets. The Insolvency Service can also seek disqualification under the CDDA 1986 for up to 15 years. See our sibling on wrongful trading for the reasonable-diligence defence.
Do non-executive directors have the same duties?
Yes. Section 250 CA 2006 defines 'director' to include any person occupying the position, and section 251 catches shadow directors. NEDs, de facto and shadow directors are all in scope for s.172, s.214 and s.213 IA 1986. NEDs cannot rely on 'I wasn't involved' — they must actively engage with the going-concern question.
What is the difference between wrongful and fraudulent trading?
Wrongful trading (s.214) is objective: a reasonable director would have known insolvent liquidation was inevitable and failed to minimise loss to creditors. Fraudulent trading (s.213 civil, s.993 CA 2006 criminal) requires intent to defraud creditors. Both can be brought against directors of an insolvent company; fraudulent trading is far rarer because intent is hard to prove.
Can I resign to avoid liability?
Not usefully. Resignation does not extinguish liability for acts or omissions while in office. It can even worsen the position, because you lose visibility of decisions that a court will later scrutinise. Advice from a licensed insolvency practitioner before resigning is essential.
Is my D&O insurance any use here?
It depends on the wording. Most D&O policies exclude fraudulent trading and deliberate wrongdoing but respond to wrongful trading defence costs and civil claims. Notify your insurer as soon as insolvency is on the horizon — late notification is a common ground for declinature.
Get the paper trail right this week. Chris at Sell Ltd routes directors to licensed insolvency practitioners who assess the timeline before problems become claims.