12 Top Tips for UK Directors When the Company Is in Financial Distress

The patterns that trip up UK company directors when the business slides into financial
distress are remarkably consistent. The same dozen mistakes appear in disqualification
investigations, wrongful trading claims and failed Company Voluntary Arrangements year after
year. The same dozen disciplines distinguish the directors who emerge with their reputation
intact from those who do not.

This guide distils twelve practical tips. The underlying ideas are drawn from the published
work of UK insolvency practitioners — particularly Andrew McTear (founding partner of McTear
Williams & Wood) and the Pocket Lawyer: Corporate Insolvency handbook he
co-authored with Frank Brumby, Chris Williams and Rosy Border (Routledge, 2004) — together
with public regulatory guidance from R3, ICAEW and the Insolvency Service. Where ideas come
from a specific source, that source is named in line. Each tip is anchored in current UK
statute.

1. Keep contemporaneous board minutes that record creditor-interest considerations

Once insolvency is on the horizon, the director’s duty under section 172 of the
Companies Act 2006 shifts in favour of creditors (the rule confirmed by the Supreme
Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25). Board minutes that record what
options were considered, why a particular path was chosen, and how creditor interests were
weighed are the strongest defence against a later wrongful trading claim under
section 214 of the Insolvency Act 1986. Reconstructed minutes after the fact
are weak; weekly contemporaneous minutes are strong.

2. Get every piece of professional advice in writing — and minute exactly why you departed from it

“The accountant said it was fine” is not a defence to a CDDA disqualification application.
Written advice can be relied on; verbal advice generally cannot. If a director receives
written advice and chooses not to follow it, the reason should be minuted at the time.
Statutory anchor: CDDA 1986 section 6 and Schedule 1 (factors of unfit
conduct); IA 1986 section 214(4) reasonable-diligent-director test.

3. Stop paying dividends the moment distributable reserves become doubtful

McTear Williams & Wood describe dividend payment from a stretched company as the most
common mistake they see distressed-director clients make. Unlawful dividends become
repayable personally on insolvency. Switch director remuneration to PAYE salary as soon as
distributable reserves are not clearly positive. Statutory anchor: Companies Act 2006
sections 830, 836 and 847; IA 1986 section 212 misfeasance.

4. If the director’s loan account goes overdrawn above £10,000, get a shareholder resolution today

The Companies Act allows loans to directors below £10,000 without member approval; above
that threshold, member approval is required. Without the resolution, the IP will demand
repayment in liquidation and HMRC will assess the section 455 corporation tax charge.
Statutory anchor: Companies Act 2006 sections 197 to 214;
Corporation Tax Act 2010 section 455.

5. Treat HMRC as a negotiating partner — open Time to Pay before you miss a deadline

HMRC is the largest unsecured (or, since the Finance Act 2020, the secondary preferential)
creditor in the majority of insolvent companies. McTear Williams & Wood describe a CVA as
“the ultimate Time to Pay agreement” — an apt mental model. Open the Time to Pay
conversation before the next due date is missed; the application is made directly by the
director through the Business Payment Support Service. Statutory anchor: Finance
Act 2020 (HMRC secondary preferential status for VAT, PAYE, NIC).

6. Watch for the four early warning signs

Public IP guidance consistently lists four warning signs of impending insolvency:

• The business is being run for cash flow rather than for profitability.
• The company cannot pay its debts as they fall due (the cash-flow insolvency test).
• The balance sheet shows liabilities exceeding assets (the balance-sheet insolvency test).
• There is no credible recovery plan in place.

Two of these four are the statutory tests for insolvency under
section 123 of the Insolvency Act 1986. When two or more are present, the
creditor-duty shift has happened; act accordingly.

7. Do not make preferential payments to friendly creditors, family or yourself in the run-up to a formal procedure

Any payment that puts an associated creditor in a better position than they would be in
liquidation is reversible by the IP, with a two-year look-back for connected parties.
Statutory anchor: IA 1986 sections 238 (transactions at undervalue) and 239
(preferences); section 240 relevant time provisions.

8. In a CVA, secure HMRC’s view in writing before the decision date

HMRC routinely swings the 75% creditor vote required for CVA approval, particularly in
SME cases. HMRC’s specialist Voluntary Arrangement Service publishes the factors it considers;
engaging proactively before the decision date is materially more productive than discovering
HMRC’s objection at the meeting itself. Statutory anchor:
Insolvency Rules 2016 Part 2; IA 1986 Schedule A1.
The full proposal-drafting framework sits in the
CVA self-help guide.

9. Use the Part A1 moratorium for breathing space — directors stay in possession

The Corporate Insolvency and Governance Act 2020 introduced a free-standing 20-business-day
moratorium under Part A1 of the Insolvency Act 1986. Directors retain
management control; a monitor (licensed IP) confirms rescue is likely. Under-used by SMEs.
A quiet way to fend off a winding-up petition while restructuring conversations conclude.
The mechanics are covered in the
moratorium & phoenix guide.

10. The buck stops with the director — do not blame the accountants

The Insolvency Service investigates the conduct of the director, not the adviser. Section 174
of the Companies Act 2006 imposes a duty of care, skill and diligence — to the standard of
both the reasonable diligent person and the actual director’s specific knowledge and
experience. Statutory anchor:
CDDA 1986 section 6 and Schedule 1;
Companies Act 2006 section 174.

11. Engage a licensed IP early enough that you still have options

McTear Williams & Wood publish the figure that around three-quarters of clients who
engage them in time avoid a formal insolvency process altogether. The corollary: directors
who wait until the winding-up petition is presented have already lost the rescue, CVA,
administration and pre-pack options. Engaging an IP early — armed with the documents
covered in this site’s longer guides — preserves choice. Statutory anchor:
IA 1986 Schedule B1 (administration); section 84 (CVL).

12. Keep the books — physically — and never surrender originals unconditionally

Books and records are the director’s first and last line of defence in any subsequent
investigation. Originals (or certified copies) should remain accessible to the director, not
archived beyond reach. Statutory anchor:
Companies Act 2006 section 386 (duty to keep accounting records);
CDDA 1986 Schedule 1 paragraph 4 (failure to keep proper records as a factor
in unfit conduct).

How Chris turns each tip into a document

Each of the twelve tips above produces a specific document or filing. Chris drafts the lot:
the creditor-duty board minute (post-Sequana), the dividend cessation resolution,
the shareholder loan resolution under CA 2006 section 197, the HMRC Time to Pay application
letter, the Part A1 moratorium filing pack, the CVA proposal package, the records-keeping
register, the wrongful-trading defence file under IA 1986 section 214.

Tell Chris the company’s facts. Upload the management accounts, the last 90 days of board
minutes, the creditor schedule and any HMRC correspondence. Chris produces the full document
set, statute-referenced, ready for review by the licensed IP and the company’s solicitor.
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Companion guides

• Director’s pre-insolvency step-by-step guide
• CVA self-help drafting guide
• DIY CVA & insolvency forms toolkit
• Phoenix strategy & Part A1 moratorium
• Director disqualification defence (CDDA 1986)
• All insolvency & debt forms — full hub

The twelve tips draw on the public guidance of Andrew McTear (founding partner of
McTear Williams & Wood) and the Pocket Lawyer: Corporate Insolvency handbook
(Brumby, McTear, Williams and Border, Routledge, 2004), together with R3, ICAEW and
Insolvency Service guidance. The expression of each tip is original; statutory anchors are
current as at the date of writing.

This is procedural literacy, not legal advice. Insolvency carries personal director
liability under sections 213 and 214 of the Insolvency Act 1986; complex situations should
be reviewed by a qualified insolvency practitioner or solicitor before formal steps are taken.