What are directors' duties when a startup is running out of money?
By SuLe · Updated 18 May 2026
When insolvency becomes probable, your duties as a director shift from serving shareholders to prioritising creditors — the principle the Supreme Court confirmed in BTI v Sequana. Keep trading past the point where there is no reasonable prospect of avoiding insolvent liquidation and you risk personal liability for wrongful trading.
Key facts
- As insolvency becomes probable, directors must prioritise creditors' interests (BTI v Sequana [2022] UKSC 25).
- Wrongful trading (Insolvency Act 1986, s.214) can make directors personally liable for continuing past the point of no return.
- Directors can be disqualified for up to 15 years for unfit conduct (Company Directors Disqualification Act 1986).
- Do not prefer connected creditors or take deposits you cannot fulfil as insolvency approaches.
- The playbook: take advice early, minute your decisions, and monitor the position honestly.
When do my duties change?
In normal times, directors run the company in the interests of its members — the shareholders — under the Companies Act 2006. That default flips as the company's finances deteriorate.
In BTI v Sequana, the Supreme Court confirmed that when insolvency becomes probable, directors must start weighing creditors' interests, and the nearer insolvency gets, the more those interests dominate. At the point of inevitable insolvent liquidation, creditors' interests are paramount.
There is no bright-line date; it is a judgement about probability. That uncertainty is exactly why early advice matters — you need to recognise the shift before it is obvious in hindsight. [More: What are directors' duties under the Companies Act 2006?]
What is wrongful trading?
Wrongful trading, under section 214 of the Insolvency Act 1986, targets directors who carry on trading after the point where they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation.
If that happens and the company later goes into insolvent liquidation, a court can order the directors to contribute personally to the company's assets — piercing the usual protection of limited liability.
It is not about dishonesty; honest optimism is no defence if a reasonable director would have stopped. The defence is taking every step to minimise creditor losses once you recognised the position — which only works if you acted, and recorded it.
What personal consequences can directors face?
Three overlap. Wrongful trading can make you personally liable to top up the company's assets. Preferring some creditors over others can see those payments unwound in a later liquidation.
Separately, the Company Directors Disqualification Act 1986 lets a court ban you from acting as a director for up to 15 years for unfit conduct in an insolvent company. Disqualification and personal liability can both flow from the same failure.
These are not remote risks in a messy wind-down — they are the standard tools used against directors who trade on too long or play favourites with creditors.
| Risk | Source | Consequence |
|---|---|---|
| Duty shift to creditors | BTI v Sequana [2022] UKSC 25 | Decisions judged against creditors' interests |
| Wrongful trading | Insolvency Act 1986, s.214 | Personal contribution to company assets |
| Preferring creditors | Insolvency Act 1986 | Payments unwound; conduct counted against you |
| Disqualification | CDDA 1986 | Ban of up to 15 years |
What should directors actually do?
The playbook is short and it works. Take professional advice early — from a solicitor or insolvency practitioner — the moment the finances look genuinely doubtful, not once the money has gone.
Minute your board decisions carefully, showing what you knew, what you considered and why you acted as you did. Contemporaneous records are your best evidence that you behaved reasonably.
Treat creditors even-handedly: do not repay a director's loan or a favoured supplier ahead of others, and do not take customer deposits for things you cannot deliver. Those steps protect creditors and, in doing so, protect you. [More: How do I shut down a startup properly (strike-off vs liquidation)?]
Is running low on cash the same as insolvency?
No — and confusing the two causes mistakes in both directions. A cash squeeze with a credible funding round or recovery plan is not the point of no return, and stopping too early can needlessly destroy a viable business.
Equally, a plausible-sounding plan is not a licence to trade indefinitely. The honest test is whether there is a reasonable prospect of avoiding insolvent liquidation, reviewed as facts change.
Because that judgement is hard and the personal stakes are high, this is the classic moment to bring in an adviser rather than decide alone under pressure.
Worked example
Marcus chairs an edtech running low on runway: roughly two months of cash and a funding round that has gone quiet. Rather than press on and hope, the board takes advice from an insolvency practitioner early.
They minute every meeting, model realistic scenarios, and set a clear decision point: if the round is not signed by a fixed date, they will stop. When a friendly supplier asks to be paid ahead of others, they decline, treating creditors even-handedly on advice.
The round ultimately fails, and the company enters a creditors' voluntary liquidation in an orderly way. Because Marcus took advice, kept records and did not prefer connected creditors, the directors avoid personal liability and disqualification — the process is difficult but clean.
Where founders go wrong
Trading on in hope
— optimism is no defence to wrongful trading if a reasonable director would have stopped; monitor honestly.Not minuting decisions
— without contemporaneous records you cannot later show you acted reasonably.Repaying a director's loan or a favoured supplier
— preferring connected creditors as insolvency nears can be unwound and held against you.Waiting until the cash is gone to get advice
— early advice is what keeps directors on the right side of their duties.
Related questions
When do directors' duties shift towards creditors?
When insolvency becomes probable. The Supreme Court in BTI v Sequana confirmed that as insolvency approaches, directors must weigh creditors' interests, and the closer it gets the more those interests dominate over shareholders'. Below that threshold you still run the company for its members. [More: What are directors' duties under the Companies Act 2006?]
What is wrongful trading?
Under section 214 of the Insolvency Act 1986, if directors keep trading past the point where there was no reasonable prospect of avoiding insolvent liquidation, they can be made personally liable to contribute to the company's assets. It is about carrying on too long, not about dishonesty.
Can I be banned from being a director?
Yes. Under the Company Directors Disqualification Act 1986, unfit conduct in an insolvent company can lead to disqualification for up to 15 years. That sits alongside personal liability, so the stakes of getting the wind-down wrong are high.
Should I stop trading the moment cash is tight?
Not necessarily — tight cash is not the same as no reasonable prospect of recovery. The key is to take advice early, monitor the position honestly, and minute your decisions. Stopping too early or too late both carry risk, which is why professional advice matters.
Can I pay a friendly supplier or my own loan first?
Be very careful. Preferring connected creditors — paying a supplier you favour, or repaying a director's loan — as insolvency approaches can be unwound and counted against you. Treat creditors even-handedly and take advice before making selective payments.
The line between reasonable optimism and wrongful trading is a legal judgement with your personal assets on the other side of it — and it is easiest to see clearly with advice, early. A SuLe solicitor can help you read the position, document your decisions, and steer an orderly process. Book a free consultation with a startup solicitor as soon as the finances look doubtful, not after.
Keep reading: How do I shut down a startup properly (strike-off vs liquidation)? · What are directors' duties under the Companies Act 2006? · What legal prep does a startup need before an exit? · How should I handle a legal letter or threat against my startup? · What happens to SEIS/EIS investors in an exit? · What is a founder secondary and when can I sell some of my shares?
Primary sources: Companies Act 2006 · GOV.UK — Liquidate your limited company
