What happens to Directors when a company faces insolvency?

When a company enters liquidation or administration, directors often ask: “What does this mean for me personally?” It’s a fair question, and one that deserves clear, practical guidance.

Here are five key areas directors should consider:

1. Director’s Loan Account (DLA)

One of the most common concerns during insolvency is the reconciliation of the Director’s Loan Account. Understandably, this can feel daunting, but with the right preparation, it doesn’t need to be.

Directors may draw funds from their company for services provided. However, if more money has been withdrawn than contributed, and it hasn’t been treated as salary or dividends, it’s considered a loan to the director.

When a company ceases trading, directors may not have a clear picture of their DLA balance. Ideally, accounts should be brought up to date before insolvency proceedings begin, but limited resources and competing priorities often make this difficult.

Once appointed, the liquidator or administrator will review the most recent accounts and prepare any missing financial records to determine the final DLA position. It’s essential that directors ensure all personal contributions such as expenses paid on behalf of the company, loans made to the business, or unpaid drawings are properly documented and considered.

Before entering insolvency, we recommend that the director, company accountant, and proposed insolvency practitioner meet to review the DLA in detail.

2. Directors as employees

Directors who are also employees may be eligible to claim from the Insolvency Service for:

• Wage arrears
• Holiday pay
• Notice pay
• Redundancy pay

The current maximum weekly wage for claims is £719. For long-serving directors, this can result in a significant claim.

However, directors who have structured their remuneration as a low salary topped up by dividends may face challenges. The Insolvency Service has clarified that salaries below minimum wage, often used for tax efficiency do not meet the legal threshold for employee claims. As a result, claims based on such arrangements may be rejected.

3. Holding other Directorships

Being a director of one insolvent company does not automatically affect your ability to act as a director elsewhere. You are not required to resign from other directorships unless you are formally disqualified.

However, if disqualification proceedings are brought and upheld, they will apply to all current and future directorships.

4. Director disqualification proceedings

The Insolvency Service reviews the conduct of directors involved in a company’s management during the three years prior to insolvency.

While only around 3% of directors are ultimately disqualified, it’s important to understand the risks. 

Common reasons for disqualification include:

• Repeated business failures
• Trading while knowingly insolvent
• Misuse of creditor or HMRC funds

Currently, there is heightened scrutiny around the misuse of Bounce Back Loans and CBILS funding.

5. Personal credit rating

In most cases, a company’s insolvency does not affect a director’s personal credit rating unless the director has provided a personal guarantee (PG) for company debts.

If a PG exists, it’s crucial to engage with the creditor early. Open and honest communication about repayment options can help avoid further financial strain and may allow for renegotiated terms.

Final thoughts

When a company begins to experience financial distress, it’s vital that directors seek early, informed advice. Understanding the personal implications of insolvency can help directors make better decisions and avoid unnecessary complications.

If you or a client would like to discuss any of the above in more detail, please don’t hesitate to get in touch.