What Are My Duties as a Director When My Company Is in Financial Difficulty?
When a company is under financial pressure, directors are often forced to make difficult decisions quickly.
You may be trying to keep the business trading, deal with HMRC arrears, manage supplier pressure, protect staff, satisfy the bank, and reassure customers — all while wondering whether your own position is at risk.
That is when director duties become more important.
The issue is not simply whether the company is struggling. The real question is whether the directors are making decisions carefully, honestly, and with proper regard to the company’s financial position.
In most cases, directors are not criticised because they tried to save a business. Problems usually arise when they continue without a plan, ignore creditor interests, make selective payments, fail to keep records, or delay taking advice until the position has become much worse.
This guide explains what directors should think about when a company is in financial difficulty, how duties can shift as insolvency risk increases, and what practical steps directors can take to protect both the company and themselves.
For a broader overview of the personal risks and options available, read our cornerstone guide: Director Assistance When a Company Is in Financial Distress: What You Need to Know.
Directors’ Duties Do Not Disappear in a Crisis
A company crisis does not suspend a director’s duties.
Directors must continue to act responsibly, in good faith and in the interests of the company. In normal trading conditions, that usually means promoting the success of the company for the benefit of its shareholders.
When the company is financially distressed, the position becomes more sensitive. Directors may need to place greater weight on the interests of creditors, particularly where insolvency is likely or there is no realistic prospect of avoiding it.
This does not mean every company in difficulty must immediately stop trading.
Many businesses go through short-term pressure. Cash flow can tighten, customers may pay late, projects may overrun, HMRC arrears may build, or a key contract may be delayed. In some cases, the business can be stabilised with the right plan.
The important point is that directors should recognise when the situation has moved beyond ordinary commercial pressure and into financial distress.
At that stage, decisions need to be more structured, better documented and supported by reliable information.
If you are already at that stage, TRE’s Director Assistance service is designed to help directors understand their duties, assess personal risk and make better decisions before options narrow.
What Changes When a Company Is in Financial Difficulty?
When a company is solvent and trading normally, directors can usually focus on growth, investment, dividends, expansion and shareholder returns.
When a company is in financial difficulty, the board has to think differently.
Directors should consider:
whether the company can pay debts as they fall due;
whether trading is improving or worsening the position;
whether new liabilities can be paid;
whether creditor pressure is increasing;
whether HMRC arrears are being managed or simply delayed;
whether personal guarantees may be triggered;
whether payments to connected parties could be challenged;
whether the company is relying on unrealistic assumptions;
whether professional advice is needed.
The shift is from optimism to evidence.
Directors do not need to be pessimistic, but they do need to be realistic. A turnaround plan based on reliable cash flow information is very different from hoping that “something will come in next month.”
Where the business still has a viable route forward, TRE can assist with Strategic Planning, including viability reviews, board support and a practical plan for stabilising the position.
The Duty to Consider Creditors
One of the most important changes during financial distress is the increasing relevance of creditor interests.
In simple terms, when a company is insolvent or close to insolvency, directors should be careful not to act in a way that worsens the position for creditors.
This does not mean every creditor must be paid equally every day. Businesses in distress still need to make commercial decisions. Some payments may be necessary to preserve value, complete work, keep essential supplies moving or support a rescue plan.
However, directors should be able to explain why those decisions were made.
For example, paying a critical supplier so the company can complete a profitable contract may be commercially sensible. Repaying a loan to a connected party while HMRC, staff or trade suppliers remain unpaid may create a very different concern.
The key question is:
Was the decision made for a proper commercial reason, with the company and creditors in mind, or was it made to protect one person or one connected party?
That distinction matters.
Can Directors Keep Trading?
Yes, in many cases directors can continue trading while the company is under pressure.
Financial difficulty does not automatically mean the company must cease trading. Many businesses can be rescued, refinanced, restructured or sold. Continuing to trade may preserve jobs, protect customer value, generate income and improve the outcome for creditors.
The risk comes when directors continue trading without a realistic plan.
Directors should ask:
Is the company generating positive cash flow?
Are new debts being paid as they fall due?
Are tax liabilities increasing?
Are customer deposits being used safely?
Are suppliers being told the truth?
Are forecasts realistic?
Is there a clear route to recovery?
Is the position being reviewed regularly?
Would stopping now produce a better outcome for creditors?
If the answer to these questions is unclear, the company may need urgent advice.
The decision to continue trading should not be passive. It should be active, reviewed and recorded.
If creditor pressure, HMRC arrears or cash flow problems are beginning to restrict your options, TRE’s Insolvency Avoidance support can help assess whether the company can be stabilised before formal insolvency becomes unavoidable.
Wrongful Trading: Why It Matters
Wrongful trading is one of the areas directors often worry about most.
In broad terms, wrongful trading risk can arise where a company later enters insolvent liquidation or administration and the directors knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, but failed to take appropriate steps to minimise potential loss to creditors.
This is why timing matters.
The issue is not whether the company was under pressure. It is whether the directors reached, or should have reached, the point where insolvent failure could not realistically be avoided — and what they did after that point.
Directors should not assume that taking advice means the company must close. In many cases, advice helps directors decide whether continued trading is justified and what steps are needed to reduce risk.
Those steps may include:
preparing short-term cash flow forecasts;
holding regular board reviews;
stopping loss-making work;
avoiding new credit unless repayment is realistic;
communicating with key creditors;
preserving company assets;
avoiding connected-party payments;
considering restructuring options;
documenting decisions clearly.
The law does not expect directors to perform miracles. But it does expect them to act responsibly when insolvency risk is clear.
The Importance of Reliable Financial Information
Directors cannot make good decisions without reliable information.
When a company is in financial difficulty, the board should understand the current position as accurately as possible.
That usually means reviewing:
cash at bank;
aged creditors;
aged debtors;
HMRC arrears;
PAYE, VAT and corporation tax liabilities;
bank and finance obligations;
rent and lease commitments;
employee costs;
personal guarantees;
customer deposits;
work in progress;
short-term cash flow forecasts;
upcoming payment deadlines.
This does not need to be perfect before directors act. In a distressed business, information is often incomplete. But directors should make a genuine effort to understand the position and update it regularly.
The danger is making decisions based on instinct alone.
A director may believe the company can trade through the problem, but that belief should be tested against actual cash flow, creditor pressure, profit margins and realistic assumptions.
Why Board Minutes Matter
When a company is in financial difficulty, board minutes and decision records become very important.
If the company later enters liquidation or administration, decisions may be reviewed with hindsight. Directors may be asked why they continued trading, why certain creditors were paid, why new credit was taken, or why advice was not sought earlier.
Good records help directors explain their decisions.
Board minutes should usually record:
the company’s current financial position;
key creditor pressure;
HMRC arrears;
cash flow forecasts;
funding or restructuring options;
advice received;
risks discussed;
decisions made;
reasons for those decisions;
review dates.
These records do not need to be complicated. What matters is that they show the directors were paying attention, considering the right issues and making decisions for proper reasons.
Poor records can make responsible decisions look careless. Good records can help show that directors acted properly, even if the business later fails.
This is also where structured Strategic Planning can help directors move away from reactive decisions and towards a clearer, better-documented plan.
Payments to Creditors: What Directors Should Consider
Directors of distressed companies often face the same immediate problem: there is not enough cash to pay everyone.
This creates pressure. The loudest creditor may demand payment. HMRC may threaten enforcement. A supplier may refuse to release stock. A landlord may threaten action. A lender may demand arrears. A connected party may want repayment.
Directors should be careful.
Some payments may be commercially justified. For example, paying a supplier to complete profitable work may preserve value for the company and creditors as a whole.
Other payments may create risk, especially where they benefit connected parties or reduce a director’s personal exposure.
Directors should be particularly cautious about:
repaying loans to directors, shareholders or family members;
paying debts personally guaranteed by directors;
transferring money to connected companies;
paying one creditor without a commercial reason;
moving assets out of the company;
paying dividends when profits are uncertain;
favouring creditors because they are personally close to the directors.
The question is not simply “who is shouting loudest?”
The question is “what payment is in the company’s interests and can be justified if reviewed later?”
Dividends, Salaries and Directors’ Loan Accounts
Directors should also review how they are being paid.
In many owner-managed companies, directors draw a mix of salary, dividends and loan account payments. When the company is profitable, this may be normal tax planning. When the company is distressed, it needs careful review.
Dividends can only be paid from distributable profits. If dividends are paid when the company does not have sufficient profits, they may be unlawful and could potentially be challenged later.
Directors’ loan accounts can also become a problem. If a director has taken more from the company than they were entitled to, the loan account may be overdrawn. In an insolvency process, that balance may be pursued as an asset of the company.
Directors should check:
whether dividends were properly declared;
whether management accounts supported those dividends;
whether salary payments are up to date and properly recorded;
whether the directors’ loan account is overdrawn;
whether the company can afford ongoing drawings;
whether any payments could be criticised later.
This is an area where early review can prevent a manageable issue becoming a serious personal exposure.
For more detail on how these issues fit into the wider director risk picture, see Director Assistance When a Company Is in Financial Distress.
Personal Guarantees and Director Duties
A personal guarantee creates a separate personal risk for the director.
When a company is distressed, directors may feel pressure to pay personally guaranteed debts first. That is understandable, but it can be dangerous if it is done without considering the wider creditor position.
For example, repaying a bank loan because the director has guaranteed it may reduce the director’s personal exposure. But if that payment worsens the position for other creditors, it may be questioned later.
This does not mean a personally guaranteed debt can never be paid. It means the decision should be commercially justifiable and properly recorded.
Directors should understand:
what guarantees they have signed;
which creditors hold them;
how much is at stake;
whether any security is attached;
whether demands have been made;
whether negotiation is possible;
whether payment decisions could be challenged.
A director’s personal exposure should be reviewed as part of the wider business strategy, not separately from it.
TRE’s Director Assistance service can help directors review personal guarantees, overdrawn loan accounts and other personal risk areas alongside the company’s wider options.
Dealing With HMRC
HMRC is often one of the largest and most important creditors in a distressed company.
VAT, PAYE, National Insurance and corporation tax arrears can build quickly. Directors may be tempted to treat HMRC as a flexible source of cash flow, especially where the business is waiting for customers to pay.
That approach can become risky.
Directors should consider:
whether HMRC arrears are increasing;
whether returns are being filed on time;
whether current taxes are being paid;
whether Time to Pay may be realistic;
whether the company can maintain any proposed arrangement;
whether other creditors are being paid while HMRC is left behind;
whether tax arrears indicate a deeper viability issue.
A Time to Pay proposal should be based on realistic forecasts, not hope. If the company cannot maintain current tax liabilities as well as arrears, further advice is needed.
Where HMRC pressure is part of a wider cash flow problem, TRE’s Insolvency Avoidance support can help directors consider creditor strategy, cash flow stabilisation and the realistic options available.
Employees and Director Duties
Directors also need to consider employees.
When cash is tight, payroll can become a major pressure point. Directors may delay wages, reduce hours, make redundancies or ask staff to continue working while the future is uncertain.
These decisions must be handled carefully.
Directors should think about:
whether wages can be paid when due;
whether employees are being kept properly informed;
whether redundancies may be needed;
whether consultation obligations arise;
whether pension contributions are up to date;
whether holiday pay and arrears are building;
whether continued trading is fair to staff if there is no realistic plan.
Employees are often among the people most affected by business distress. A clear plan helps directors make better decisions and communicate more responsibly.
What Directors Should Avoid
When a business is under pressure, directors should avoid decisions that may make the position worse.
Common mistakes include:
continuing to trade with no plan;
ignoring cash flow forecasts;
failing to update financial information;
taking further credit when repayment is unlikely;
using customer deposits to pay old debts;
paying connected parties ahead of ordinary creditors;
paying personally guaranteed debts without advice;
declaring dividends without sufficient profits;
allowing HMRC arrears to grow without a plan;
transferring assets away from the company;
failing to record board decisions;
waiting until legal action has started.
Most of these mistakes are avoidable.
The earlier directors pause and review the position, the more options they usually have.
Practical Steps Directors Should Take Now
If your company is in financial difficulty, the following steps can help you regain control:
Prepare a short-term cash flow forecastUnderstand what money is expected in and what must be paid out over the next few weeks.
List all creditorsInclude HMRC, lenders, suppliers, landlords, finance providers, employees and connected parties.
Identify urgent pressure pointsLook for threats of legal action, winding up petitions, enforcement, supply withdrawal or bank action.
Review personal guaranteesKnow where personal exposure exists before creditors take formal steps.
Check directors’ loan accountsUnderstand whether any director owes money back to the company.
Hold regular board reviewsDiscuss the financial position properly and record the decisions made.
Avoid connected-party payments without adviceThese are often scrutinised if the company later enters insolvency.
Communicate carefully with creditorsDo not make promises the company cannot keep.
Take advice earlyEarly advice does not mean the company has failed. It means directors are taking their duties seriously.
If you are unsure where to start, contact TRE for a confidential discussion about the company’s position and your duties as a director.
How TRE Helps Directors
TRE helps directors understand their duties, assess their options and make practical decisions when the company is under financial pressure.
That support may include:
reviewing the company’s financial position;
assessing whether the business can continue trading;
identifying immediate director risks;
reviewing personal guarantees;
considering overdrawn directors’ loan accounts;
supporting board decision-making;
helping with creditor strategy;
reviewing HMRC pressure;
considering restructuring or insolvency avoidance options;
preparing directors for possible formal insolvency if it cannot be avoided.
The aim is to give directors clarity.
Sometimes the right answer is a turnaround plan. Sometimes the business needs to be restructured. Sometimes formal insolvency may be unavoidable. In every case, directors should understand their duties and protect their position before options narrow.
For wider support, see TRE’s services for Director Assistance, Strategic Planning and Insolvency Avoidance.
Final Thoughts
Director duties matter most when decisions are difficult.
If your company is in financial difficulty, you do not need to have all the answers immediately. But you do need to act responsibly, understand the financial position, consider creditor interests, keep proper records and take advice where needed.
Trying to rescue a business is not wrong. Continuing without a plan is where risk increases.
TRE provides calm, confidential director assistance for SMEs in financial distress. We help directors understand their duties, assess personal exposure and make clear, defensible decisions at the right time.
If your company is under pressure and you are unsure what to do next, contact TRE for confidential director assistance before options narrow.
Frequently Asked Questions
What are my duties as a director if my company is struggling?
You must continue to act responsibly and in the interests of the company. As insolvency risk increases, you should give greater consideration to the interests of creditors and avoid decisions that could worsen their position.
For a wider overview, read Director Assistance When a Company Is in Financial Distress.
Do I have to stop trading if the company cannot pay all its debts?
Not always. A company may continue trading if there is a realistic plan and continued trading is not worsening the position for creditors. Directors should take advice if they are unsure.
TRE’s Strategic Planning support can help directors assess whether continued trading is realistic and properly supported.
Can I be personally liable for company debts?
Usually, company debts belong to the company. However, directors can become personally exposed through personal guarantees, overdrawn loan accounts, wrongful trading, misfeasance, unlawful dividends or challenged transactions.
TRE’s Director Assistance service is designed to help directors understand these personal risk areas.
What is wrongful trading?
Wrongful trading can arise where directors continue trading when they knew, or should have known, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and they failed to take appropriate steps to minimise losses to creditors.
Should I pay HMRC before other creditors?
There is no simple rule that HMRC must always be paid first. Payment decisions should be based on the company’s overall position, creditor interests and a clear commercial rationale. HMRC arrears should not be ignored.
If HMRC pressure is part of a wider financial problem, TRE’s Insolvency Avoidance advice can help assess the available options.
Can I repay money owed to me by the company?
You should be very careful before repaying directors, shareholders, family members or connected parties when the company is in financial difficulty. Such payments may be reviewed if the company later enters insolvency.
Should board meetings be recorded?
Yes. When a company is distressed, board minutes and decision records can be very important. They help show what was considered, what advice was taken and why decisions were made.
When should I take director advice?
You should take advice as soon as you are unsure whether the company can pay its debts, creditor pressure is increasing, HMRC arrears are growing, personal guarantees are at risk, or there is no clear plan for recovery.
You can contact TRE for calm, confidential advice on your duties, personal exposure and the company’s options.
