Restructuring and Insolvency

Lefteris Kallou
July 2026

In the face of financial uncertainty, timely and informed decision-making can mean the difference between recovery and collapse. Pre-insolvency advice plays a critical role in helping businesses navigate financial distress before matters escalate. However, many directors only seek advice once it is too late, at which point their options may be far more limited.

There is a common misconception that a director’s personal assets are protected if a company enters liquidation. In reality, that is not always the case. Directors can find themselves defending claims brought by liquidators and incurring significant legal costs – issues which could often have been avoided or at least mitigated by taking early pre-insolvency advice.

In many cases, it is a company’s accountant who first identifies the warning signs – whether through cash flow pressures, missed tax liabilities or deteriorating balance sheets. Accountants are therefore often in a key position to flag concerns early and encourage directors to seek legal advice before the situation escalates.

What Is Pre-Insolvency Advice?

Pre-insolvency advice refers to guidance provided before formal insolvency procedure commence, often arising in response to pressure from creditors such as HMRC or suppliers. Its primary aim is to help those facing (or foreseeing) financial difficulty explore recovery options, comply with legal obligations, minimise personal exposure, and protect the interests of creditors.

Pre-insolvency advice is particularly vital for directors, who must act responsibly and in accordance with their duties under the law.

In practice, directors receive very little guidance when they take on the role. As a result, they are often unaware of the extent to which they can be personally exposed if things go wrong. This commonly leads to situations where directors:

  • fail to seek professional advice once insolvency becomes foreseeable;
  • continue trading despite mounting financial pressure; or
  • do not properly document key decisions in the lead up to insolvency.

We see many directors (particularly of SMEs and family-owned companies) who run their businesses informally. This often results in a failure to hold regular board meetings, properly record decisions, or maintain adequate accounting records. In many cases, this informal approach can create serious issues if the company later enters insolvency, particularly where there are gaps in decision-making records or financial documentation. These shortcomings often come under scrutiny during investigations.

Why does early insolvency advice matter?

One of the most important aspects of pre-insolvency advice is timing. The earlier advice is taken, the more options are typically available. Acting early can significantly improve the prospects of rescuing the business and reducing personal risk for directors.

What are the consequences of not taking advice?

When directors delay or do not take advice, they expose themselves to serious consequences, including:

  1. Personal Liability

If a company continues to trade while insolvent or the directors conduct themselves in a manner which is prejudicial to the interests of creditors, they may be held personally liable for their misconduct. Legal proceedings may be initiated by any number of stakeholders against the directors, including shareholders, creditors and insolvency practitioners.

  1. Personal Guarantees being called in

Individuals who provide personal guarantees for company loans may find themselves personally liable if the company defaults. Pre-insolvency advice can help assess the risk and explore options to mitigate exposure.

  1. Loans being called in

Most loan agreements contain an ‘event of default’ clause. If this is triggered, a lender may call in the entirety of the loan irrespective of whether the company has kept up with its repayments to the lender. This is common if a winding-up petition has been presented against a company.

  1. Poor record-keeping

Failing to document key decisions can significantly weaken a director’s position in insolvency. Proper records are essential to demonstrate how decisions were taken and what factors were considered in reaching decisions at the time, such as relying on professional advice.

  1. Director Disqualification

Under the Company Directors Disqualification Act 1986, directors found to have acted improperly may be disqualified from acting as a director for up to 15 years. This could have a devastating impact on individuals whose livelihood depends on them acting as a director. It also has reputational consequences as disqualifications are published on a public register. Financial orders may also be sought against directors in the form of compensation orders.

What Does Pre-Insolvency Advice Involve?

In practice, pre-insolvency advice is tailored to the company’s circumstances, but it typically involves a combination of financial, legal and strategic input:

  1. Financial Position Assessment
  • Reviewing the company’s solvency status.
  • Evaluating the company’s cash flow and balance sheet position, including forecasts, and liaising with internal and external accountants.
  • Identifying early warning signs of insolvency.
  1. Legal Risk Evaluation
  • Advising on directors’ duties, including whether dividends should be declared and distributed, the status of outstanding directors’ loan accounts and transactions entered into in the lead up to insolvency.
  • Ensuring compliance with the Companies Act 2006 and Insolvency Act 1986.
  1. Strategic Planning
  • Exploring informal arrangements with creditors.
  • Considering formal options such as Company Voluntary Arrangements (CVAs), administration, liquidation, or Time to Pay Arrangements with HMRC.
  • Preparing for structured processes like a Pre-Pack Administration, which allows for the sale of a business as a ‘going concern’ without impacting on the continuity of business operations upon appointment of an administrator. This helps preserve the value of the company and its assets (particularly ‘work in progress’) as well as ensuring continuity for employees during the sale process. 

Case Studies

  1. Representing a director-shareholder of a travel business that was adversely impacted by the Covid-19 pandemic and volatile currency exchange rates. Given the company’s previous success, the director tried to trade through the turbulent period but challenging trading conditions continued, including tax rate increases, all of which led to the company’s liquidation. The liquidators issued a claim against the director for the events leading up to the company’s liquidation for continuing to trade whilst the company was insolvent and unable to pay its debt. Pre-insolvency advice would have objectively identified issues of concerns and steps which could be taken to minimise his exposure and the interests of the company’s creditors.
  2. The directors of a company became concerned that it may not be able to meet its short-term liabilities, including payroll, after failing to secure further funding. Advice was sought on whether the company should continue trading, whether a formal insolvency process should be considered, and the extent of the directors’ potential personal exposure if trading continued.
  3. We had a client company who was directly liaising with HMRC with respect to an outstanding debt. As they did not engage solicitors to act on their behalf, they failed to prevent a winding up order being made against the company which led to an expensive and stressful application being made to rescind an otherwise solvent company. Had the company had legal representation, the winding up order could have been avoided and an alternative arrangement reached with HMRC.

Pre-insolvency advice would have identified the risks at an earlier stage and allowed steps to be taken to minimise exposure and protect creditor interests.

Final Thought

Pre-insolvency advice is not about accepting failure – it is about creating options.

For directors, taking advice early can make a significant difference, both in terms of protecting the business and limiting personal exposure. Waiting too long, on the other hand, can quickly narrow those options and increase the risks involved.

If you are a director facing financial pressure, or an accountant advising a client in this position, taking early advice can make a material difference to the outcome.