When a Company Is “Technically Insolvent” but Still Trading — What Directors Get Wrong
Many directors assume insolvency only happens when the bank account hits zero. In practice, companies can keep trading, pay some bills, and still be insolvent.
This article explains what directors commonly misunderstand about insolvency, when risk becomes personal, and what prudent directors do early to reduce litigation exposure.
Key takeaways
- Insolvency is not just “no cash”. The key question is whether the company can pay debts as and when they fall due.
- Continuing to trade can increase personal exposure. Timing, knowledge, and documentation often decide outcomes later.
- Good directors act early. Proper records, careful decision-making, and timely advice preserve options and reduce risk.
Insolvency is not about cash today
One of the most common things directors say in insolvency litigation is:
“We didn’t think the company was insolvent — it was still trading.”
It is often said honestly. It is also often wrong.
Insolvency is not determined by whether a business is open, issuing invoices, or paying some creditors. A company may be insolvent even if it is still operating.
The question is whether the company can pay its debts as and when they fall due. That assessment looks forward as well as at current pressures.
The three assumptions that cause the most damage
In litigation, the same misconceptions appear repeatedly. They tend to surface late, after the paper trail is already set.
1) “It will turn around next month”
Hope is not a strategy. Courts look at what information was available at the time and whether a reasonable director would have concluded the company could meet its obligations.
Optimism without evidence rarely protects directors.
2) “The accountant didn’t say we were insolvent”
Accountants prepare financial information. They do not make directors’ decisions. Directors cannot outsource statutory duties.
If cash flow forecasts, aged payables, creditor pressure, or repeated deferrals indicate a problem, directors are expected to engage with that information.
3) “Everyone trades like this”
Many businesses trade while stretched. That does not make it lawful.
Patterns like rolling arrears, extended payment plans, and selective payment of creditors can become warning signs that the question is no longer purely commercial.
When risk shifts from commercial to personal
There is often a tipping point where continuing to trade stops being a business decision and becomes a personal exposure issue for directors.
That moment often arrives earlier than expected and is usually identifiable in contemporaneous documents such as:
- board minutes and director resolutions
- emails and internal messaging about creditor pressure
- cash flow forecasts and “short-term” funding assumptions
- payment approvals and decisions about who gets paid (and who does not)
- instructions to staff about supplier management and arrears
By the time a liquidator is appointed, those documents often tell a story directors did not intend — but cannot undo.
Many claims turn less on technical legal argument and more on knowledge, timing, and evidence.
What prudent directors do early
Directors who manage risk well do not wait for certainty. They act while options still exist.
Depending on the circumstances, that often includes:
- properly minuted board discussions focused on cash flow and creditor risk
- obtaining advice early (and using it carefully)
- considering restructuring options before the position becomes irreversible
- avoiding selective or preferential payments that will be scrutinised later
- improving record-keeping so decisions can be explained if challenged
Early action does not necessarily mean immediate insolvency. In many cases, it preserves value and reduces personal exposure.
Why most insolvency litigation is lost before it starts
By the time proceedings are issued, the critical events have already occurred. What commonly undermines directors is not a lack of effort or intent, but:
- poor records
- informal decision-making
- delay in responding to obvious cash flow pressure
- underestimating how closely conduct will be examined with hindsight
Once insolvency is obvious, litigation risk is often already baked in.
Final thought
Insolvency rarely arrives with a clear siren. It creeps in through creditor accommodation, repeated deferrals, and “temporary” decisions that become permanent.
Directors who recognise that early — and slow down rather than push harder — are far more likely to protect both the company and themselves.
If you are a director facing sustained cash flow pressure, early advice can help you understand options, reduce risk, and protect value.
