When am I personally at risk of wrongful trading under section 214?

Section 214 of the Insolvency Act 1986 makes a director personally liable to contribute to the company's assets where they continued to trade after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. The "moment of truth" was identified by the court in Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520. The test has two components: an objective limb (what would a reasonably diligent director with the same skills have known?) and a subjective limb (what did this director actually know?). After the moment of truth, you must have taken every step a reasonably diligent director would take to minimise loss to creditors. A documented decision — to cut overheads, cease taking new orders, seek IP advice, file for administration — is the clearest defence. An undocumented continuation of trade as before is the riskiest position.

How does the section 239 preference rule work — and what counts as a connected party?

A preference under section 239 of the Insolvency Act 1986 is something the company does (typically a payment) that puts a creditor in a better position than they would have been in had the company gone straight into insolvent liquidation. The company must also have been "influenced by a desire" to produce that result. The look-back period is six months for unconnected creditors and two years for connected creditors. Connected parties (defined in IA86 s.249) include directors, their families, and associated companies — broadly any party with a controlling relationship to a director or the company. Where the preferred party is connected, the "desire" is presumed, and the director has the evidential burden of rebutting that presumption. Classic patterns: repaying a director's loan while leaving trade creditors unpaid; paying off a personally-guaranteed bank facility in the months before liquidation; granting security to a connected lender for past consideration.

When is a dividend "unlawful", and what are the consequences?

A dividend or other distribution must be made out of profits available for that purpose (section 830 Companies Act 2006). The reserves test is applied at the date of the actual decision to declare the dividend — not the year-end. If reserves did not in fact justify the distribution at the moment it was voted, the dividend is unlawful. Section 847 CA06 makes the recipient (where they knew or had reasonable grounds for believing it was unlawful) liable to repay the company. In an owner-managed company that knowledge test is usually met as a matter of course. The position is reinforced by Re Marini Ltd [2004] BCC 172 and the BHS Group judgments — directors carry the burden of demonstrating that proper interim accounts justified the distribution at the moment it was made. Dating the voucher to the year-end without contemporaneous interim accounts is not a defence; it is, on its face, false accounting under Theft Act 1968 s.17.

I have an overdrawn director's loan account — what happens in liquidation?

An overdrawn DLA is a personal debt owed by you to the company. On liquidation the liquidator has a statutory duty to pursue recovery — there is no discretion to write it off. The company's claim against you forms part of the realisations available to creditors. Before liquidation there are legitimate ways to address an overdrawn DLA: a genuine personal repayment from outside funds (evidenced by the bank statements on both sides); a properly-declared bonus with PAYE/RTI; a lawful dividend (subject to distributable reserves at the date of declaration). All of these need contemporaneous documentation. A journal entry that clears the DLA without a real cash movement, without PAYE, and without contemporaneous board minutes will rarely survive scrutiny — and may itself be challenged as a transaction at undervalue (s.238) or misfeasance (s.212).

Can I transfer the trade and assets to a new company before liquidation? (phoenix activity)

Phoenix activity — transferring trade, customers, plant or goodwill to a successor company controlled by the same director — is not unlawful in itself. Many businesses survive a liquidation in just this way, and where the transfer is properly priced (with independent valuation evidence and a marketing process) it can be entirely legitimate. The risks: a transfer at an undervalue gives rise to a section 238 claim by the liquidator (two-year look-back, the company's insolvency presumed where the counterparty is connected); a transfer to put assets beyond creditors' reach engages section 423 (no look-back limit, any "victim" creditor can apply); and IA86 s.216 restricts the use of the same or similar name to the failed company by its directors for five years following insolvency (with limited exceptions). The safest path is to discuss the planned transfer with an IP before it happens. A pre-pack sale supervised by an IP, with independent valuation, is materially different from an informal asset transfer in the days before liquidation.

Will I be disqualified as a director after a CVL?

In most CVLs, no. Disqualification proceedings under CDDA 1986 s.6 are taken by the Insolvency Service only in cases where there is evidence of conduct that makes the director unfit to be concerned in company management. The liquidator's confidential report under CDDA s.7A — submitted on every director who served in the three years preceding insolvency — is the gateway to those proceedings. Conduct that may lead to disqualification includes allowing the company to trade while insolvent for an unreasonable period, failing to maintain proper accounting records, failing to file statutory returns, non-payment of Crown debts (VAT, PAYE), unlawful dividends, and clear preferences. A disqualification order typically lasts 2-15 years. Following disqualification the Secretary of State may seek a compensation order under CDDA s.15A. For ordinary commercial failures handled through a properly-conducted CVL, with cooperation with the liquidator and no clear misconduct, directors typically continue trading through new ventures without difficulty.

Director Duties

Jurisdiction: England & Wales

Reviewed by Joe Whiley MIPA, Licensed Insolvency Practitioner (IPA Licence 29410).

Company directors have legal duties at all times, but these responsibilities become especially important when a business is experiencing financial difficulty. Understanding your director duties helps protect both creditors and yourself while ensuring decisions are made appropriately.

When a company is solvent, directors primarily act in the interests of shareholders. Once insolvency becomes probable, the focus shifts towards protecting creditor interests. This shift is the rule restated by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25: the duty under section 172(3) of the Companies Act 2006 engages when directors know, or should know, that the company is insolvent, bordering on insolvency, or that insolvent liquidation or administration is probable — and intensifies as the prospect approaches inevitability.

Key director duties

Directors must act responsibly and in good faith when managing company affairs. The general duties of directors are codified in CA06 ss.171–177:

Acting within powers (CA06 s.171)
Promoting the success of the company — with creditor interests engaged once the company is in the “zone of insolvency” (CA06 s.172)
Exercising independent judgment (CA06 s.173)
Exercising reasonable care, skill and diligence (CA06 s.174)
Avoiding conflicts of interest (CA06 s.175)
Not accepting benefits from third parties (CA06 s.176)
Declaring interest in proposed transactions (CA06 s.177)
Maintaining adequate accounting records sufficient to show and explain the company's transactions (CA06 ss.386–389)

Duties when insolvency is suspected

Once insolvency is known or reasonably foreseeable, directors must prioritise creditor interests and take steps to minimise potential losses. The Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520 “moment of truth” — the point at which a reasonably diligent director would have concluded there was no reasonable prospect of avoiding insolvent liquidation — is the threshold above which section 214 wrongful trading liability can attach. From that moment the test becomes whether you took every step a reasonably diligent director would have taken to minimise loss to creditors.

Common risks for directors

Wrongful trading — continuing to trade when there is no reasonable prospect of avoiding insolvency (IA86 s.214)
Preference payments — favouring certain creditors over others; 2-year look-back if connected (IA86 s.239)
Transactions at undervalue — disposing of assets below market value; 2-year look-back (IA86 s.238)
Misfeasance — misuse or misapplication of company money or assets (IA86 s.212)
Unlawful dividends — distributions made without sufficient distributable reserves; Re Marini Ltd [2004] BCC 172 establishes the burden is on the director
Poor record keeping — inability to evidence decision-making or financial position (CA06 ss.386-389)

Eight practical principles in the “zone of insolvency”

These eight practical principles will keep a director on the right side of the line in the majority of cases. They are not a substitute for case-specific advice but they are the working rules a careful director should adopt the moment financial difficulty appears.

1. Take the snapshot

At the moment financial difficulty is identified, take a dated snapshot of the management accounts, the bank position, the director's loan account, and the open creditor and debtor positions. File it. Anything done after the snapshot is, by definition, "after-the-event" and must be capable of being defended as such.

2. Correct errors, do not make improvements

You can correct errors. You cannot make changes that improve your own position relative to creditors without an evidential basis. The test is: would I have made this entry if the company were going to keep trading?

3. Document substance over form

Every material decision needs an evidential basis (invoice, receipt, contract, bank record), a contemporaneous decision (board minute, written instruction, email trail), and an explanation that fits the underlying commercial reality. A journal on its own is not a decision.

4. Date things truthfully

Documents must be dated the day they are made. Board minutes prepared today and dated three months ago are false instruments — criminal exposure under the Theft Act and Fraud Act. If a decision was made and not minuted at the time, the proper course is a current-dated minute that records what was decided then.

5. Apply the "true and fair view" test

If a year-end adjustment is required for the accounts to give a true and fair view (CA06 s.396), it is defensible. If it makes the accounts less representative of reality but improves your apparent position, it is suspect.

6. Connected-party scrutiny

Treat any transaction with a connected party (family, related companies, spouse's entity) as if it were the cover photograph of the liquidator's report. Apply independent valuation and arm's-length terms. Document the rationale. If the transaction would not survive scrutiny in those terms, it should not happen.

7. Independent verification at material thresholds

For any material adjustment in the zone of insolvency — reclassifying a DLA, voting a late dividend, an asset transfer, a write-off, granting security — require an independent reference point: a valuation, a tax opinion, a legal opinion, or insolvency advice from an IP. Obtain it before the entry is posted, not afterwards.

8. Engage an IP early

Once insolvency is on the horizon, an early confidential conversation with a licensed insolvency practitioner is almost always the right step. A good IP will explain what can and cannot be done, what statutory tools are available, and how to deal with the DLA, dividends and connected-party balances in a way that does not generate avoidable personal liability. The conversation itself is typically free.

Should directors stop trading?

Not necessarily. Continuing to trade can be appropriate where there is a realistic recovery plan. The key consideration is whether trading improves or worsens creditor outcomes. Professional advice can help assess this objectively. A documented decision to continue trading (with the evidence base behind it) is materially different, in a subsequent investigation, from continuing trading by default.

Why early advice matters

Seeking advice does not commit you to liquidation, but it does help you understand your position and responsibilities. Directors who engage early typically experience fewer complications and greater clarity — and have a documented professional step that protects them if conduct is later scrutinised by the liquidator or the Insolvency Service.

Speak to Insolvency Direct Ltd

If you are concerned about your duties as a director or your company's financial position, we can provide confidential guidance, explain your responsibilities, and outline appropriate next steps. No obligation — just clear advice.

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