Directors in the danger zone

When the creditor duty switches on

The Supreme Court in Sequana was asked to say the duty arises on a mere "real risk" of insolvency. It refused.

The majority line you should be able to repeat: the creditor duty is engaged when the directors know or ought to know that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. A remote or real-but-not-probable risk is not enough. Once liquidation or administration is inevitable, creditors' interests are paramount — the shareholders no longer have a valuable interest to promote.

Solvency, for this purpose, is the Insolvency Act 1986 section 123 idea: cash-flow (cannot pay debts as they fall due) or balance-sheet (liabilities exceed assets, including contingent and prospective). You do not get to pick the test you prefer.

Practical consequence: if VAT is late, the account is at its limit, a short-term sweep is the only reason wages landed, and you are hoping a warehouse facility "will sort it", you are at least in the conversation. You ought to know. Closing your eyes is not a defence.

Wrongful trading — section 214

Once you knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation (or insolvent administration), you must take every step with a view to minimising potential loss to creditors.

It is not a crime in itself. It is a civil claim a liquidator or administrator can bring, with a contribution to the deficiency. The court looks at what a reasonably diligent person with your actual knowledge, and the knowledge you ought to have had, would have done.

What "every step" looks like in real life:

• stop taking new credit you cannot pay;
• stop stacking short-term products;
• take advice from a licensed insolvency practitioner, and minute it;
• do not pay connected parties ahead of the taxman and the trade;
• do not draw a dividend, or a fat director's loan, "because we always do";
• keep trading only if there is a reasonable prospect, documented, not a vibe.

COVID-era temporary relief on wrongful trading expired. Do not rely on a 2020 memory.

Fraudulent trading, misfeasance, and the rest of the toolbox

Section 213 fraudulent trading — business carried on with intent to defraud creditors. Higher bar, uglier consequences, including possible criminal overlap.

Section 212 misfeasance — a summary route for breaches of duty, including the Sequana duty, in a liquidation.

Section 239 preference — putting a creditor (or a guarantor) in a better position, influenced by a desire to prefer, in the relevant time before insolvency. Connected parties have a longer look-back and a presumption.

Section 238 transaction at undervalue — selling the van to your brother, or the premises to a newco, for a price that is not real.

Section 423 transactions defrauding creditors — a wider net, not limited to the eve of insolvency in the same way.

Illegal dividends — distributions when you had no profits available. Sequana itself was about a dividend. Even a lawful-looking dividend can be attacked if the creditor duty was engaged and ignored.

Overdrawn director's loan account — money you took that the company cannot now afford. In a liquidation it gets called. Treating it as "drawings" does not make it wages.

Section 216 prohibited names — you cannot simply phoenix the same name, or a name so similar as to suggest continuation, without the statutory routes. The "newco, same van, same mobile" plan has a specific trap.

Company Directors Disqualification Act 1986 — unfitness. Bounce Back Loan misuse, HMRC ignored, trading on while taking deposits you could not deliver: these are how disqualification reports get written.

None of this requires you to be a villain. It requires you to be a director of a company that ran out of cash and then did the instinctive things — pay the supplier who shouted, pay yourself, hope.

Minutes a court will actually want

Not a novel. A paper trail that shows you saw the numbers and took advice.

• A weekly cash view: what must be paid, what can wait, what must not be paid (connected, self, dividend).
• The HMRC position, in figures, not "we're talking to them".
• The stack of short-term facilities and their collections.
• A note of advice from a licensed insolvency practitioner, or a solicitor, with the date.
• A decision: continue for a defined reason, or open a formal process.
• What you stopped doing: new credit, drawings, related-party payments.

If the only record is WhatsApp with the broker, that is the record.

Bounce Back and the other COVID leftovers

Bounce Back Loans were designed to be easy to take and are now being picked over. Using the money for the company is one story. Using it for a personal asset, or stacking it into a connected firm, is another. Insolvency practitioners and the British Business Bank's recovery work have years of this left. If BBLS is on the balance sheet, tell the truth in the pack. Hiding it is worse than the loan.

What to do this week if you think the duty is on

1. Stop signing new short-term facilities. Warehouse brokers.
2. Stop paying people just because they shouted. Help that is actually there.
3. File what is unfiled. Ring HMRC with a schedule you can keep. HMRC Time to Pay.
4. Speak to a licensed insolvency practitioner. First conversations are often without a fee. They can tell you whether a moratorium, a CVA, administration, or a solvent path is the adult option.
5. If there is still a refinance that can last, package it properly. That is what Strata does: we map the whole position, deal with HMRC first if tax arrears are part of the picture, and take one honest file to a lender who can actually hold it. We do not lend, and we do not take the insolvency appointment — that split is the point.

This is training. It is not advice on your facts. If a solicitor or a licensed IP tells you something different on your numbers, they win.