Directors’ duties when the company is in trouble

Corporate & Commercial10 June 20256 min read

People form companies partly for the shield they provide: the company, not its owners, carries the debts and the risk. For the most part that shield holds. But it is not absolute, and it is under the most pressure precisely when a business is struggling, the moment directors are most tempted to trade on in hope, and most exposed if they get it wrong. Understanding what you owe as a director, and where the personal line sits, is not a technicality. It is the difference between a company that fails and a director who fails with it.

What every director owes

The core duties are consistent across most jurisdictions. A director must act in good faith and in the best interests of the company, use their powers for a proper purpose, avoid conflicts between their own interests and the company’s, and exercise reasonable care, skill, and diligence. Crucially, these duties are owed to the company itself, not to any one shareholder, and not to yourself. Being a passive or “sleeping” director is no defence; the law expects you to know what is going on and to keep yourself informed enough to act.

When the interests shift to creditors

While a company is healthy, directors act in the interests of its members. As it approaches insolvency, the law increasingly expects directors to consider the interests of creditors, the people who will go unpaid if the company cannot meet its debts. This shift is easy to miss because it happens gradually, without a formal trigger, and often at exactly the point when a director’s instinct is to protect the business rather than the people it owes.

The trap of trading while insolvent

The sharpest personal risk is incurring new debts when the company cannot pay the ones it has. In many jurisdictions a director can be held personally liable for debts the company takes on while insolvent, the shield falls away, and the director’s own assets are exposed. The danger is that hope is not a defence: continuing to order stock, take deposits, or sign up suppliers while quietly insolvent, in the belief things will turn around, is exactly the conduct the law is designed to catch.

What a careful director does early

The protective moves are unglamorous and must be made before the crisis, not during it. Keep accurate, current financial records so you actually know the company’s position. Watch the warning signs, persistent losses, unpaid tax, creditors chasing, finance being refused. Document the decisions you make and the reasons for them. And get advice early: restructuring and insolvency specialists exist precisely to help directors navigate this window, and in some jurisdictions taking proper advice and acting on it is itself a recognised protection. This is the corporate cousin of the disciplined first moves in any dispute, act on facts, keep the record clean.

The line to remember

The corporate shield is real, but it rewards directors who take the role seriously and punishes those who look away. The obligations bite hardest when the company is weakest, so the time to understand them is while things are still going well, the same logic that makes due diligence before a purchase worth the effort. This article is general information only and is not legal advice; directors’ duties and insolvency law vary significantly by jurisdiction, so seek advice on your specific situation without delay if your company is under strain.