A haulier in Doncaster has a bad spring. A customer goes under owing him £47,000, his insurance renewal jumps, and he is three weeks behind on VAT. He decides to trade through it. He takes new work, buys fuel on credit he knows he may not be able to pay for, and draws his usual money out of the company because his mortgage does not care about his cash flow.
Nine months later the company goes into liquidation. The liquidator is not interested in whether he was unlucky. The liquidator is interested in the date he knew, and in what he did afterwards.
Seven duties, and they are owed to the company
The Companies Act 2006 codified directors' duties into seven sections, and they apply to every director of every company, including the person who is the sole director of a company with one van.
Act within your powers, meaning in accordance with the constitution and only for the purposes for which your powers were conferred. Promote the success of the company for the benefit of the members as a whole, having regard to the long term, the interests of employees, relationships with suppliers and customers, the impact on the community and the environment, the company's reputation, and the need to act fairly between members. Exercise independent judgement. Exercise reasonable care, skill and diligence. Avoid conflicts of interest. Do not accept benefits from third parties. Declare any interest in a proposed transaction with the company.
The duty most often breached in small companies is the last one, usually without anybody meaning to. If the company buys a van from your brother, or rents premises from a company you own, or pays a consultancy fee to your spouse, that is an interest that has to be declared and recorded. In a single-director company it feels absurd to declare something to yourself. Do it anyway, in the minutes, because the audience for those minutes is a liquidator or an HMRC officer several years from now.
The care and skill duty has two levels. It is measured both by what a reasonably diligent person with the general knowledge and experience reasonably expected of someone in that role would do, and by what you personally know. A qualified accountant who becomes a director is held to the higher standard of the two. You cannot benefit from your own inexperience, and you cannot escape your own expertise.
The company you serve changes when insolvency comes into view
This is the part that matters and the part almost nobody is told. In normal trading, you promote the success of the company for the benefit of the shareholders. When the company is insolvent, or is bordering on insolvency, the duty shifts and creditors' interests come into it.
The Supreme Court examined this directly in BTI 2014 LLC v Sequana SA in 2022. The court confirmed that a creditor-focused duty exists, that it is engaged when the directors know or ought to know that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable, and that it grows stronger as the position worsens until, once insolvent liquidation is inevitable, creditors' interests are paramount.
In practice this means that the decision the haulier made, to keep drawing money and taking on credit, was made at the exact moment the rules changed under him. Once you are in that territory, paying yourself, paying a connected creditor in preference to others, or giving a family member security over company assets are all acts a liquidator can unwind.
Insolvency has two tests and you can fail either. The cash flow test is whether you can pay your debts as they fall due. The balance sheet test is whether your liabilities, including contingent and prospective ones, exceed your assets. A company with a full order book and no money is insolvent on the first test, and a full order book is not a defence.
Wrongful trading is about the day you should have stopped
Section 214 of the Insolvency Act 1986 makes a director personally liable to contribute to the company's assets if, before the start of the winding up, they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and they did not take every step to minimise the potential loss to creditors.
Notice the shape of it. There is no dishonesty requirement. Wrongful trading is a negligence standard, and it is judged with all the calm of hindsight by someone reading your bank statements in order. The defence is not that you were optimistic. The defence is that from the moment you knew, you acted to minimise creditor losses: you took advice from a licensed insolvency practitioner, you stopped taking deposits you could not fulfil, you stopped incurring credit, you kept a record of the reasoning behind each decision.
Fraudulent trading, under section 213, is a separate and more serious matter requiring intent to defraud, and it carries criminal liability as well.
Two other traps sit nearby. An overdrawn director's loan account, where you have taken more out than the company owed you, becomes a debt you personally owe the company and a liquidator will pursue it. And a dividend can only be paid out of distributable profits under Part 23 of the Companies Act 2006. If the profits were not there, the dividend was unlawful and is repayable, which is how directors who thought they were taking a tax-efficient income discover they were taking a loan.
Disqualification is the long tail
Under the Company Directors Disqualification Act 1986, a director whose conduct makes them unfit to be concerned in the management of a company can be disqualified for between two and fifteen years. The Insolvency Service investigates conduct in every corporate insolvency, which means somebody reads what you did as a matter of routine rather than only when someone complains.
The common grounds are unremarkable and domestic: trading while insolvent to the detriment of creditors, failing to keep or deliver up adequate accounting records, failing to pay Crown debts such as VAT and PAYE while paying other creditors, and taking money out of an insolvent company.
A disqualified person cannot be a director, and cannot be involved in the promotion, formation or management of a company, directly or indirectly, without leave of the court. Acting in breach is a criminal offence and also makes you personally liable for the company's debts incurred while you were doing it. The register of disqualified directors is public.
Limited liability is real, and it is conditional. It protects a director who runs a company badly and honestly. It does not protect one who keeps trading past the point where they should have picked up the phone.
Where this shows up in the game
Business Baron does not let limited liability be a free pass. Trade through a period you should have stopped in and the consequences arrive later as a personal matter rather than a company one, delivered by named people with a view about your conduct. Records you did or did not keep become evidence. Directors' loans, dividends drawn from profits that were not there, and the month you first knew are all tracked. You can find out where the line was in a game rather than in real life.