5 Things Directors Should Do to Avoid Insolvency (and What to Do if It’s Already on the Horizon)
Most insolvencies don’t happen overnight. In plenty of cases, there are warning signs for months before things become critical. The difference usually comes down to whether directors act early and make informed decisions.
Below are five practical points that consistently make a difference, either in avoiding insolvency altogether, or in dealing with it properly if it can’t be avoided.
1. Stay close to the numbers
Directors don’t need to be accountants, but they do need a clear, up-to-date view of cashflow, liabilities falling due, HMRC exposure, and overall trading performance. Cashflow is particularly important. A business can be profitable on paper and still fail if it cannot pay its debts on time. Without reliable numbers, decisions are often based on guesswork, which tends to make problems worse and limits options to restructure.
2. Act on early warning signs
Common early indicators include stretching creditor payments, missed tax payments, increasing reliance on short-term funding, or suppliers tightening terms. These are signals, not normal trading pressures. Waiting for certainty or hoping things will turn around often reduces the available options. Acting early preserves flexibility.
3. Take advice early
Insolvency advice is often seen as a last resort, but early input can be what keeps a business out of formal insolvency. This might involve restructuring debt, negotiating with creditors, refinancing, or using formal processes to stabilise the business. Early advice improves outcomes and demonstrates responsible decision making.
4. Adjust your decision-making
Once insolvency is likely, directors’ duties shift towards protecting creditors rather than shareholders. This means avoiding decisions that worsen creditor losses, not taking on new liabilities without a clear repayment ability, and properly documenting key decisions.
5. Don’t ignore the problem
Trying to trade out of difficulty needs to be grounded in a realistic plan. Assuming issues are temporary, using new credit to repay existing debt, or injecting personal funds without strategy often increases losses. Directors are expected to minimise losses once insolvency is unavoidable, not increase them. In some cases, they could be held liable for any wrongful trading.
Final thought
Insolvency is rarely caused by a single decision. It is usually the result of delays, assumptions, or missed warning signs. Directors who deal with it well tend to recognise issues early, stay close to the numbers, and take advice before options narrow. Even where insolvency can’t be avoided, handling it properly makes a material difference.
Contact myself, Shaun Walker, at Mercer & Hole if you are dealing with any financial distress and would like to explore the options available to you.
I advise business owners, directors and their advisers on restructuring, insolvency and business recovery matters.
