What happens to directors of an insolvent company?

Julie Palmer

Managing Partner and Licensed Insolvency Practitioner

Updated

5 August 2026

When a limited company becomes insolvent, directors are typically protected by the ‘veil of incorporation’ and don’t face the same risk of personal liability as sole traders, whose business debts must be paid from personal funds. This is because a limited company is classed as a separate legal entity from that of its directors and shareholders; the business operations and financial position of a sole trader, however, are indistinguishable from their personal position.

There are instances where directors aren’t protected, however, and if the interests of creditors aren’t placed first, whether deliberately or not, directors are susceptible to accusations of wrongful trading or misconduct.

So let’s look at what happens to directors when their company becomes insolvent. The first change occurs when an administrator or liquidator is appointed.

“The question we hear most from directors facing insolvency is, unsurprisingly,  ‘what happens to me?’ In most cases, the answer is far less severe than they expect. Limited liability means your personal assets are generally protected during formal insolvency proceedings. There will be an investigation into your conduct as director, but this is a routine process, and for directors who acted honestly and sought advice, the outcome is typically straightforward.”
— Julie Palmer, Partner, BTG Begbies Traynor

What happens to control of the company?

Control of the company passes to the administrator or liquidator as soon as they’re appointed. Directors must take a step back, but are expected to co-operate fully and provide any information requested by the office-holder.

Potential for personal liability

As we mentioned earlier, the limited company structure means the business is legally separate from its owners, but in insolvency, certain circumstances can change this default position.

If a director owes money to the company, for example by way of an overdrawn directors' loan account, the office-holder will require repayment as the money belongs to the company and can be used to repay creditors. Similarly, if a director has provided a personal guarantee in order to obtain bank lending, the lender will demand payment of the outstanding amount as the company is no longer able to meet the terms of the loan.

In both of these cases, directors face legal action if they can’t afford to pay, with the potential for bankruptcy and loss of their home.

One of the most important things to understand as a director of a company in financial difficulty is that your legal duties change. Under section 172 of the Companies Act 2006, when a company is solvent, your duty is to act in the best interests of the company and its shareholders. However, when the company is insolvent, or when insolvency becomes likely, this duty shifts and you must now act in the best interests of the company’s creditors.

This shift is critical because it changes what decisions are appropriate. Continuing to pay yourself, investing in growth, or taking on new commitments may be perfectly reasonable when the company is healthy, but can become grounds for personal liability once insolvency is on the horizon. The investigation will assess whether your conduct reflected this shift in duty.

What happens during investigations into director conduct?

When a company enters insolvency, the actions of directors are investigated by the insolvency practitioner (IP) to establish the cause of the company’s decline. If any incidences of director misconduct or wrongful trading are found, directors face serious sanctions and fines.

Essentially, the investigator will want to know that directors prioritised the interests of creditors – in other words, that they did not engage in activity which could have worsened the position of outstanding creditors as soon as it was known the company was insolvent.

They will also look for instances where creditor interests were overlooked or ignored, such as if a loan with a personal guarantee attached to it was repaid in preference to other creditors.

Penalties for misconduct or wrongful trading include disqualification as a director for 2-15 years, financial penalties, personal liability for the company’s debts, and in cases of fraud, potentially a prison sentence.

“The investigation is the part that worries directors most. But it’s important to understand that we conduct this investigation in every single insolvency case. It’s not triggered by suspicion, it’s simply a legal requirement. During the investigation, we’re looking at the circumstances that led to the company becoming insolvent, how the directors managed the company in the period leading up to it, and whether creditors’ interests were protected at this time. Directors who cooperated, sought advice, and acted responsibly have nothing to fear from this process.”
- Julie Palmer, Partner, BTG Begbies Traynor

Is it possible to become director of another company?

After the insolvency process is complete, you are generally free to become a director of another company provided the liquidator’s investigation found no wrongdoing and you have not been subject to a director disqualification order.

There is one important restriction: under Section 216 of the Insolvency Act 1986, you are prohibited from being involved in a company trading under the same or a similar name to the insolvent company for five years, unless specific exemptions apply. Breaching this is a criminal offence. For full details, see our guide to phoenix company rules.

Insolvency is not the end of the road for you running a business. Instead it is a way of drawing a line under a situation that had become unworkable, so you can move forward.

“A lot of the directors we work with are surprised by how quickly they can move on. The insolvency process handles the company’s debts, and once it’s complete, you’re free to start again. Many of our former clients are now running successful new businesses.”
- Julie Palmer, Partner, BTG Begbies Traynor

How to protect yourself as a director during insolvency

1. Seek professional advice as soon as you recognise the company is in financial difficulty. This is the single most important step to take once you know your company may be insolvent. It demonstrates that you took your duties seriously and creates a clear record of when you acted.
2. Cooperate fully with the insolvency practitioner. Provide all requested information, attend meetings, and be transparent. Non-cooperation is itself a ground for an adverse conduct report.
3. Don’t move money, pay yourself, or favour connected creditors. Any payments to yourself, family members, or related companies in the period leading up to the company becoming insolvent will be scrutinised and may be reversed.
4. Check your personal exposure. Review any personal guarantees you’ve signed and check your directors’ loan account balance.
5. Keep records of everything. Board minutes, financial records, and professional advice notes all count in your favour during the investigation.

What we typically see

A director of a hospitality business contacted us after reaching the conclusion that the company could no longer continue to trade due to overwhelming debts. Their main concerns were whether they would be personally liable for the company’s £95,000 liabilities and whether they would ever be able to run a business again.  After reviewing their position, we confirmed that the company’s debts were unsecured with no personal guarantees attached.

The investigation into their conduct found no wrongdoing and confirmed that they had acted honestly and sought advice at an appropriate time. The company entered a CVL, the debts were dealt with through the liquidation process, and the director was free to move on. They started a new business in a related sector within six months, having learned from the experience.

If your company is insolvent and you’re worried about what happens to you personally, you’re not alone, it’s by far the most common concern directors raise when they contact us. In most cases, the reality is far less severe than they expect.  Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We’ll assess your personal position, explain the process, and help you understand what to expect.