What Should a Director Do When a Company Can’t Pay Its Debts?

When a company cannot pay a debt on time, directors need a current picture rather than assumptions. Confirm bank balances and facilities, debts already due, payroll and tax dates, secured liabilities, personal guarantees, expected receipts and commitments that cannot be cancelled.

A temporary timing problem, a disputed debt and a company with no realistic way to meet accumulating liabilities require different responses. Record what is known, what remains uncertain and when the board will review the position again.

Preserve accounting records, bank statements, tax filings, contracts, invoices, payroll information, asset records, board minutes and correspondence with lenders and creditors. Do not alter, destroy or backfill material to make the position appear better than it was.

Good records help directors understand the company’s position and explain why decisions were made. If an insolvency process follows, an office-holder will need information about the company’s affairs and relevant transactions.

Prepare a short-term cash-flow forecast using realistic receipt dates, essential operating costs, debt due dates and future tax liabilities. Test a downside case for late customer payments, lost work or reduced facilities rather than relying only on the most optimistic outcome.

Review the forecast frequently and reconcile it to the bank. A forecast is useful only if assumptions are updated and directors respond when actual trading differs from the plan.

Open and identify every demand, judgment, statutory demand or petition immediately. Give creditors accurate information and avoid repayment promises the company cannot reasonably keep. Obtain legal advice promptly where a formal deadline or disputed claim is involved.

An informal payment discussion may help in some cases, but it does not bind creditors who have not agreed and does not necessarily suspend enforcement. Keep a record of proposals, responses and deadlines.

Payment decisions need a documented commercial and creditor-focused basis. A transaction may later be examined if it puts one creditor, surety or guarantor in a better position because of a desire to prefer them, particularly where that person is connected with the company.

Preference risk does not mean that every payment must stop. Payments needed to preserve value or support an evidence-based strategy may be appropriate, but directors should not improvise priorities or repay themselves, relatives, guarantees or connected balances without specific advice.

Before taking new orders, using more supplier credit or entering fresh commitments, consider whether the company has a reasonable basis to perform and pay. Do not mislead suppliers, customers or lenders about the company’s ability to meet a new obligation.

Seek advice from an appropriately qualified professional early. Bring the cash-flow forecast, recent accounts, creditor list, details of assets and security, tax position and key contracts. Early advice does not predetermine liquidation; it helps the board assess whether an informal agreement, funding, restructuring, formal rescue or orderly closure should be considered.