When directors of distressed companies finally reach out to an Insolvency Practitioner (IP), it’s often later than ideal. That timing is shaped by a few recurring misconceptions and missteps. Here are the big ones, and why they matter.
1. Waiting for “certainty” instead of acting on warning signs
Many directors delay because they’re hoping things will turn around, such as a new contract, funding, or seasonal upswing. By the time cash runs out or creditors escalate, options like restructuring or informal agreements are far more limited.
2. Poor financial visibility
Outdated or inaccurate management accounts make it hard to assess the real situation. Directors may rely on gut instinct instead of up-to-date cash flow forecasts, which leads to delayed or misinformed decisions.
3. Treating cash flow problems as temporary glitches
A surprising number of businesses operate profitably on paper but collapse due to a lack of cash flow. Directors sometimes think, “we’re profitable, so we’re fine,” ignoring mounting arrears to HMRC, suppliers, and rent. Insolvency is about the ability to pay debts when due, not just balance sheet health.
4. Ignoring early creditor pressure signals
Late payment notices, tightened credit terms, or HMRC arrears are often early indicators. Many directors normalise these as “part of business,” rather than recognising them as escalation signals.
5. Misunderstanding duties once insolvency is likely
Directors often continue acting in the interests of shareholders when they should have shifted focus to creditors. The problem is that insolvency law doesn’t require certainty of failure, only that insolvency is likely to occur. This is a key legal pivot point. Continuing to trade without regard for creditor interests can expose directors to claims like wrongful trading under frameworks such as the Insolvency Act 1986. This can lead to personal liability for directors who have not acted correctly.
6. Selectively paying creditors when firefighting
Directors sometimes prioritise certain creditors, often those shouting the loudest, while ignoring others. This can create preference risks, where payments made before insolvency are later challenged. An IP will scrutinise these decisions closely in an insolvency situation, and this can lead to the disqualification of a director and personal liability.
7. Using personal funds without a clear strategy
It’s common for directors to inject personal savings or take on personal debt to keep the business afloat. There is also a temptation for a director to sign personal guarantees to secure additional funding for the company. Without a structured turnaround plan, this can simply deepen personal exposure without improving the company’s viability.
8. Avoiding professional advice due to fear or stigma
There’s still a stigma around insolvency, and some directors worry that calling an IP means the end. In reality, early engagement can open up recovery routes such as Company Voluntary Arrangements (CVAs) or restructuring plans. Waiting too long often removes those options entirely.
9. Assuming all insolvency routes are the same
Not all insolvency procedures mean liquidation. Directors often confuse administration, liquidation, CVAs, and restructuring plans. Each has different implications for control, survival, and creditor outcomes.
10. Not documenting decisions
When things deteriorate, directors need to show they acted reasonably and in the creditors’ interests. Failing to keep records of decisions, advice taken, and financial reviews can create problems later if conduct is examined.
When should directors speak to an Insolvency Practitioner?
Most of the above mistakes come down to delay, being overly optimistic, and having an incomplete understanding of legal duties. By the time an IP is called, the focus has often shifted from rescue to damage control. Also, actions may have been taken that could lead to legal actions against directors and possibly personal liability, too.
Directors don’t need to assume the worst, but they do need to get comfortable acting earlier, with better information. A short conversation with an Insolvency Practitioner at the first signs of distress is usually low-cost and can significantly widen the available options.
If you would like to speak to a member of our team about the options available to your business, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
