A clear, practical guide for directors facing financial distress with insights from Molly Monks of Parker Walsh

When a company enters financial difficulty, directors often focus on the immediate operational and cash-flow pressures. What is less obvious but far more serious is the potential personal risk directors may face during an insolvent liquidation. Understanding these risks early, and taking the right actions, is essential to protecting both your position and your future as a director.

To shed clarity on the issue, Molly Monks of Parker Walsh, a specialist in advising directors through insolvency, outlines the key areas of exposure and how early guidance from a licensed insolvency practitioner can significantly reduce risk.

Why Insolvent Liquidation Puts Directors Under Scrutiny

In an insolvent liquidation usually a Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation the liquidator has a statutory duty to review the conduct of the directors leading up to insolvency. If wrongdoing or mismanagement is identified, directors may face personal liability.

This does not mean directors are automatically at risk. Instead, the process ensures creditors’ interests were appropriately protected.

Key Personal Risks Directors Must Understand

1. Wrongful Trading

This occurs when directors continue trading after they knew, or ought to have known, that insolvency was unavoidable.

Risks include:

• Personal financial liability for creditor losses

• Disqualification from acting as a director

• Additional legal action

Molly Monks stresses that seeking advice early is the best defence, as directors who act responsibly and promptly are rarely pursued.

2. Fraudulent Trading

A more serious offence, involving deliberate intent to defraud creditors.

Consequences can include:

• Unlimited personal liability

• Criminal prosecution

• Director disqualification

This is rare but taken extremely seriously if proven.

3. Misfeasance or Breach of Fiduciary Duty

The liquidator may seek recovery from directors who:

• Misapplied company funds

• Transferred assets at undervalue

• Preferred certain creditors

• Failed to maintain adequate accounting records

• Did not act in creditors’ interests once insolvency was likely

These claims often arise due to poor record-keeping or lack of advice rather than intentional wrongdoing.

4. Overdrawn Directors’ Loan Accounts

If the company is owed money by the director, the liquidator is duty-bound to recover it.

Key points:

• An overdrawn DLA becomes repayable in full

• The liquidator can demand repayment or initiate legal recovery

• HMRC may scrutinise withdrawals and expenses more closely

This is one of the most common sources of personal liability in CVLs.

5. Personal Guarantees

Many directors have signed personal guarantees for:

• Bank loans

• Overdrafts

• Asset finance

• Supplier credit agreements

When the company enters liquidation, these guarantees can be triggered, making the director personally responsible for the debt.

6. Preferences & Transactions at Undervalue

If the company repaid certain creditors ahead of others especially connected parties the liquidator may reverse these transactions and investigate the director’s decision-making.

How Directors Can Minimise Their Personal Risk

1. Act Early

The earlier a director seeks professional guidance, the more options are available both for the company and for personal protection.

2. Keep Detailed, Accurate Records

Document decisions, cash-flow forecasts, board meetings, and evidence showing you acted responsibly.

3. Prioritise Creditors’ Interests

Once insolvency is likely, the law shifts your duty away from shareholders toward creditors. Decisions must be made with this in mind.

4. Avoid Taking Further Credit

Taking supplier or lender credit you know cannot be repaid can be considered reckless or fraudulent.

5. Do Not Make Preference Payments

Paying certain creditors, especially family, friends, or your own loan accounts, can be challenged later.

6. Obtain Advice from a Licensed Insolvency Practitioner

Specialists like Parker Walsh help directors understand their duties, assess their company’s financial position, and choose the safest route forward.

How an Insolvency Practitioner Protects Directors

Working with a licensed insolvency practitioner (IP) is one of the most effective ways to minimise personal risk.

According to Molly Monks of Parker Walsh, an IP typically helps directors by:

• Assessing the company’s solvency position

• Advising on legal duties and potential exposures

• Recommending the most appropriate insolvency route

• Ensuring the liquidation process is handled compliantly

• Preparing accurate reports for creditors and regulatory bodies

• Demonstrating that directors have acted responsibly and transparently

Crucially, early engagement significantly reduces the likelihood of allegations of wrongful trading or misfeasance.

Final Thoughts

Facing insolvency can be overwhelming, but directors who act early, keep clear records, and seek professional support are far less likely to face personal consequences.

As Molly Monks of Parker Walsh emphasises:

“Directors often fear personal liability, but risk usually arises only when action is delayed. The best protection is early, transparent decision-making and timely advice.”

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