When the money runs short, a director's job quietly changes
There's a moment when a struggling company stops being about the shareholders and starts being about the creditors. It doesn't announce itself — and missing it can cost a director personally.
By Robert Festenstein, Head of Legal
Updated 2 July 2026
6 min read
The short version
- Normally a director serves the company and its shareholders. When insolvency looms, the duty shifts to protecting creditors.
- Trade on with no realistic prospect of avoiding insolvency and you risk personal liability for wrongful trading.
- Personal guarantees and paying favoured creditors can also expose you personally.
- Take advice early and document your decisions — it's the best protection there is.
- There's more than one option, and acting early keeps more of them open.
When the ground moves
In the good times, a director's legal duties run to the company and, through it, its shareholders. But when a company is insolvent or heading that way, the law quietly changes the target: your duties shift towards protecting the creditors. The hard part is that this shift comes with no klaxon. It happens when insolvency becomes likely — and spotting that exact moment is precisely where directors need advice they often don't get until it's too late.
Where the personal risk is
Limited liability has limits, and financial distress is where they get tested:
- Wrongful trading. Carry on trading when you knew, or should have known, there was no realistic prospect of avoiding insolvent liquidation, and you can be made personally liable to contribute to the company's assets.
- Preferences and misfeasance. Paying yourself or favoured creditors ahead of the rest, or shifting assets on the cheap, can be unwound — and can rebound on you.
- Personal guarantees. Anything you've personally guaranteed stays your problem, whatever happens to the company.
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What to actually do
The instinct in a crisis is to put your head down and trade through it. Sometimes that's the right call — but the safe way to do it is with advice and a paper trail. Hold board meetings and minute them. Take professional advice and follow it. Keep cash-flow and forecasts under genuine review. If it later has to be shown that you acted reasonably and in the creditors' interests, contemporaneous evidence that you took advice and watched the numbers is your strongest defence.
More doors than you think
Insolvency isn't a single door marked "liquidation." Depending on the situation there may be room for a company voluntary arrangement (a deal with creditors), administration (breathing space and a shot at rescue), refinancing, or an orderly restructuring. The thread running through all of them: acting early opens more doors. Leave it too late and liquidation is the only one left. If your company's under pressure, the most valuable thing you can do is pick up the phone before the choices narrow.
Frequently asked questions
When do my duties as a director actually change?
When the company becomes insolvent, or insolvency becomes likely, your duties shift from serving the company and shareholders towards protecting creditors. The trouble is spotting that moment — it doesn't announce itself — which is why directors of a struggling company should take advice early.
What is wrongful trading?
Carrying on trading when you knew, or ought to have concluded, there was no realistic prospect of avoiding insolvent liquidation. If it's found, a director can be ordered to personally contribute to the company's assets. Taking advice and documenting your decisions is the key protection.
Is liquidation the only option for a company in trouble?
No. Depending on the circumstances there may be a company voluntary arrangement, administration, refinancing or restructuring — some of which can rescue the business. But the options narrow as time passes, so acting early is what keeps them open.
Sources & further reading
This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 2 July 2026. Buzz Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).
A solicitor with more than two decades' experience in commercial law, dispute resolution, insolvency and judicial review. Robert acts for businesses, directors and individuals on the matters that carry real consequence — and leads Buzz Solicitors.
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