Company health check: keeping your business on track
Even the best-run business can face unexpected challenges and solvency issues. It's important you recognise the signs and understand your duties as a director.
The Insolvency Service understands the reasons a company can become insolvent. This guide discusses the tell-tale signs of insolvency, and how managing an insolvent company incorrectly can lead to personal liability, being disqualified as a director, or both.
This guidance does not replace independent legal or other professional advice.
Company health check bitesize video
Your duties as a company director
As a company director, you need to be aware of your legal responsibilities. These include keeping the company records up to date, such as filing confirmation statements and company accounts on time.
There are also general duties such as exercising reasonable care, skill and diligence, and avoiding conflicts of interest.
Read more about your duties as company director
The law will see you as a director, even if you’re not formally appointed as one if you perform the duties of a director.
It’s important you understand your responsibilities before the company becomes insolvent.
Test for insolvency
There are two basic tests for insolvency when cases of insolvent companies, and the conduct of its directors, are examined by the Insolvency Service. These are:
- cash flow test
- balance sheet test
You should consider using these when you have concerns about the solvency of your company. The tests can act as a warning sign of insolvency.
Cash flow test
Signs that your company is failing this test will include late payments to suppliers who may:
- issue reminder letters
- threaten or commence recovery proceedings
- place trade accounts on stop
- insist on payment in advance for goods and services.
Falling into arrears with payments to HMRC can also be an indicator that your company is cash flow insolvent.
Balance sheet test
The balance sheet test involves looking at the value of your company’s assets and liabilities.
If the liabilities of your company are more than the value of its assets, your company is balance sheet insolvent.
Your new responsibilities
When company insolvency is a possible outcome, your responsibilities as a company director change.
You must now put the interests of the company’s creditors (anyone who is owed money) before your own interests and those of the shareholders.
Trading while insolvent and personal liability
The protection given by limited liability is a privilege not a right.
If you continue to trade while insolvent, sometimes known as wrongful trading, it can lead to you being personally liable for the debts of the company. We can also consider disqualification proceedings under the Company Directors Disqualification Act.
When we will investigate your company
We may investigate your company following formal insolvency proceedings where we receive information about your conduct as a director.
We can investigate your company if it:
- is still trading and we receive information about serious corporate abuse
- has gone into compulsory liquidation
- has been dissolved
Being disqualified as a director
If we find misconduct while you have been a director, you may be disqualified as a director for up to fifteen years.
You can also be made to repay specific amounts to creditors who lost out as a direct result of your misconduct.
Effects of being disqualified
Once disqualified, you cannot act as a company director. If you continue to act as a director while you are disqualified, you may be disqualified for a further period or you may be prosecuted.
Being disqualified also means you cannot get other people to manage the company under your instruction. If you do, those other people may also be prosecuted.
Information about disqualifications is made available to the public. Companies House holds the public register of disqualified directors and their personal information.
We also publish an online summary of disqualifications from the last 3 months, including details of misconduct that led to the disqualification.
Fact sheet: Director’s loans
A director’s loan is when a director takes money from their company that is not:
- a salary, dividend, or expense repayment
- money they’ve previously paid into or loaned to the company
The law states you must keep a record of any money you borrow from, or pay into, the company. This record is usually known as a director’s loan account.
Fact sheet: Bounce Back loans
Measures were introduced to support businesses affected by COVID-19 such as loans, grants and tax allowances.
The Bounce Back loan scheme helped small and medium-sized businesses to borrow between £2,000 and £50,000, at a low interest rate, guaranteed by the Government.
The Bounce Back loans were made on the condition that they were not to be used for personal purposes, but could be used, for example, to purchase a company asset such as a vehicle, if it would provide an economic benefit to the business.
Our Bounce Back loan fact sheet offers further guidance on Bounce Back loans and your company.
Get help and further information
If your company is in financial difficulty you should get advice from a qualified solicitor, accountant, authorised insolvency practitioner or financial adviser.
Make sure you are aware of the costs involved before appointing an adviser.
Business Debtline provides free advice and resources to help people deal with their business finances and business debts. Their service is available over the phone, through their website and by webchat.
This publication provides general information only. Every effort has been made to ensure that the information is accurate, but it is not a full and authoritative statement of the law and you should not rely on it as such. The Insolvency Service cannot accept any responsibility for any errors or omissions as a result of negligence or otherwise.
Last updated 1 April 2022 + show all updates
-
New bitesize explainer video added.
-
First published.