This guide considers some common FAQs that directors may have about insolvency situations.

What's new?


As a result of the coronavirus crisis, in March 2020 the government announced that it would temporarily suspend the wrongful trading on insolvency rules, backdated to 1 March 2020. The intention of this is to provide a short moratorium or ‘breathing space’ to give companies in difficulty time to explore options for a rescue.

See COVID-19: Insolvency & directors

Tax Abuse and Insolvency: Companies and directors

Finance Bill 2020 proposes:

From 1 December 2020

  • HMRC will become a secondary preferential creditor gaining priority in the recovery of VAT and certain other debts during insolvency proceedings.
  • This only applies to taxes collected and held by businesses in relation to other taxpayers, such as VAT, PAYE, Income Tax, employee National Insurance Contributions, Construction Industry Scheme deductions and student loan deductions.

From Royal Assent of FA2020

  • Measures to prevent the abuse of corporate insolvencies by making directors and other connected persons jointly and severally liable for the avoidance, evasion or phoenixism tax debts of the corporate entity.
  • The provisions can also apply to shadow directors as well as participators in a company if they received a benefit.
  • This will allow HMRC to recover tax and other liabilities generated from:
    • Tax avoidance or evasion.
    • Repeated insolvencies where there are outstanding tax liabilities.
    • Penalties for facilitating avoidance or evasion.
  • HMRC will treat the persons jointly and severally liable with the company to the debts.
  • A notice will not be issued to a person where HMRC are satisfied the person had acted in good faith and had no material influence over the company’s affairs.

FAQs: Directors and insolvency

Q. Can I be held personally liable for the company's debts?
Q. Do I have a duty to creditors, as well as the company?

A. Directors owe a duty of care to the company’s creditors. This is set out in the 2006 Companies Act as well as the 1986 Insolvency Act. If a company continues to trade when it is insolvent, its directors can be held personally accountable if their actions cause financial loss to any of the company’s creditors.

You will also be liable if you have personally guaranteed any of the company's borrowing.

Q. Can I be held personally liable for unpaid tax due by the company?

A. HMRC can issue a personal liability notice where there is fraud or negligence. In the case of Charles O’Rorke v HMRC [2017] TC6008, a director was held personally liable for the company's unpaid NICs because he was found to be negligent. In HMRC v Stephen West [2018] UKUT 0100, the Upper Tribunal (UT) held that the director of an insolvent company was personally liable for wilfully failing to deduct and pay PAYE and NICs on a bonus paid to clear his loan account before the company went into liquidation.

In S D Raithatha (As Liquidators of Halal Monitoring Committee Limited) v M N A Baig & Ors [2017] EWCH 2059 (Ch), the High Court found the directors were personally liable for VAT debts due to a failure to register for, and charge, VAT.

In Stanley John Chmiel v HMRC [2018] TC7112, a company director’s failure to register his company for VAT resulted in a £4,250 penalty via a Personal Liability Notice (PLN). HMRC’s powers sometimes allow it to ‘pierce the corporate veil’.

Currently, a PLN can only apply to penalties (including VAT) and not to assessments about tax other than for PAYE and NICs. If the company is already in liquidation it is possible that no appeal will have been made by the liquidator against the initial assessments and penalty notices. An individual issued with a PLN in these circumstances should take specialist advice to determine what routes of appeal, if any, are open to them.

Q. What do I do if my company is in financial difficulty?

A. Establish the facts: is the company about to become or is insolvent?

  • Use your judgement: is this a problem only on a short-term basis and will be rectified by trading on, or does this mean terminal failure, or something in the middle ground. Can all or part of the business still be saved?
  • Do not do anything (writing cheques, committing the company to any action, paying creditors, taking deposits etc) without seeking professional advice.

In many situations, one of the direct or indirect causes of insolvency is management failure. This may be accompanied by a lack of controls and characteristically this will include (but not be limited to) poor record-keeping and a lack of accurate financial information. Accurate and up-to-date accounts are vital in determining a company’s solvency. If in doubt contact a professional adviser.

Q. How do I tell if my company is insolvent?

A. A company is insolvent on a cash flow basis if it is unable to pay its debts as they fall due, or fails to satisfy a judgment debt. In addition, there is a balance sheet test for solvency which asks, “Do the company’s assets exceed all its liabilities (both contingent and prospective)?”

The cash flow test
Many companies will fail the cash flow test on a short-term basis at some time in their existence. Temporary cash flow problems may be caused by:

  • The failure of a customer to settle a debt on time.
  • Overtrading (having too much cash tied up in stock and debtors).
  • As a course of a delay in refinancing.
  • Not making the required sales to break even.
  • Having to make unscheduled payments, or to cover uninsured losses.

Short-term cash flow problems can be corrected by trading on or after rearranging overdrafts or loan finance. Currently, lenders have been much more stringent in reviewing company accounts, which means that it is essential for a director to consider the balance sheet test in tandem with any short-term cash flow difficulties.

The balance sheet test
Companies prepare accounts according to Generally Accepted Accounting Practice (GAAP) on the basis that the company will continue in business as a going concern. Additional adjustments may need to be made to account for contingent and prospective liabilities for the balance sheet test.

Contingencies by their very nature may be difficult to quantify and value. They may include items such as:

  • Warranties and indemnities on products on services and insurance excesses.
  • Long-term funding deficits on company final-salary pension schemes.
  • Potential obligations on other long-term contracts.

This list is not exhaustive, but most companies will monitor their exposure to these types of contingencies and insurance may be in place to manage risk. A company should already account for prospective and quantifiable liabilities in its financial statements. These will include liabilities on hire purchase and leasing contracts, loans and mortgages.

If a company does fail its balance-sheet test, the directors will then have to reappraise the situation. If they see that it has no reasonable chance of continuing trading in its current form then they must act to protect the interests of its creditors to avoid any allegations being made of wrongful trading under the Insolvency Act. It will no longer be appropriate to draw up accounts on a going-concern basis, restating assets will to a break-up basis which make the balance sheet look even worse.

Q. My company is insolvent, what now?

A. Directors should take the following steps:

  • Obtain competent professional advice and document the advice and their actions and responses.
  • Ensure that the company’s accounts are up to date.
  • Draw up a statement of affairs for the company, listing its creditors.
  • Consider whether all or any part of the company is capable of rescue or worth saving.
  • Discuss with professional advisers whether it will be possible to make a formal or informal arrangement with creditors.
  • If the company cannot be saved the directors should put it into liquidation without delay.

The accounts should be prepared on a break-up basis. Fixed assets will need to be revalued from their cost to their net-realisable value. Assets that have not previously been recognised in the accounts, such as self-created intellectual property can be reappraised and valued.

Q. How do I avoid any allegations of wrongful and fraudulent trading?

A. To avoid personal liability for their actions when a company is in financial difficulties its directors should be careful not to:

  • Dispose of company assets at an undervalue.
  • Prefer one creditor to the detriment of another.
  • Accept customer deposits if trade is uncertain.
  • Directors should not act without taking professional advice

Q. Who or what is 'professional advice' in relation to insolvency?

A. If the company is insolvent you need a licensed insolvency practitioner, immediately. If it is in difficulties, talk it through with your accountant, who will advise you to contact a licensed insolvency practitioner if necessary.

Q. I think that all or part of the company can be saved. What now?

A. You should consider a Company Voluntary Arrangement (CVA) or administration with a pre-pack. Before you do anything or take matters further, please take professional advice.

 NEW: It is proposed that Finance Bill 2019-20 will contain measures to:

  • Ensure that from 6 April 2020 where a company becomes insolvent with unpaid tax liabilities which it holds in trust to pay to HMRC, such as VAT, PAYE Income Tax, employee National Insurance Contributions and Construction Industry Scheme deductions, these liabilities will take priority over other unsecured or floating charge creditors.
    • Other company tax liabilities such as Corporation Tax and employers NIC will not be affected by the measure.
    • HMRC will remain below preferential creditors.
  • Allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.


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