Added to that, the trajectory of Scottish insolvency statistics tells us that financial distress is a current and increasing reality for many businesses. The latest figures from the Accountant in Bankruptcy show a sharp rise in corporate insolvencies in early 2026, driven in part by a marked increase in compulsory liquidations. That shift is significant: it points not just to business failure, but to more assertive creditor action.
For directors, the message is clear. In a tightening enforcement environment, decisions taken in the months leading up to insolvency are far more likely to be scrutinised and challenged after the event.
The combination of economic pressure and increased scrutiny by insolvency practitioners means that the risk of personal liability for directors is very real.
When Do Duties Shift?
Under Scots law, as elsewhere in the UK, directors owe their general duties to the company, codified in the Companies Act 2006. Ordinarily, that means acting in a way they consider, in good faith, would promote the success of the company for the benefit of its members as a whole.
The position becomes more complex as financial distress deepens. Where a company is insolvent or verging on insolvency, the interests of creditors come into play and ultimately become paramount. That principle is well established, but the difficulty lies in pinpointing when the shift occurs in practice. There is no single trigger. The courts have consistently adopted a fact sensitive approach. The relevant moment is not confined to balance sheet insolvency; it extends to situations where insolvency is probable or where the company is clearly on a trajectory towards it. For directors, this creates a moving and often uncomfortable line: the earlier they recognise risk, the more mindful their conduct should be.
Cashflow vs Balance Sheet Realities
In Scotland, as in the rest of the UK, insolvency remains a dual test: cashflow and balance sheet. In practice, most cases gravitate towards cashflow distress, so an inability to meet debts as they fall due.
From a personal liability perspective, contemporaneous evidence is critical. A director who can demonstrate active engagement with cashflow forecasts, creditor pressure and funding discussions will be in a far stronger position than one who simply asserts, with hindsight, that matters appeared under control.
The difficulty, of course, is that many businesses operate in a state of managed insolvency for prolonged periods. Reliance on rolling facilities, informal creditor tolerances or HMRC forbearance can mask underlying fragility. It is precisely in those circumstances that the risk of later scrutiny arises.
Wrongful Trading: The Practical Risk
The most obvious statutory risk is wrongful trading. The test is well known: did the director know or ought they to have known that there was no reasonable prospect of avoiding an insolvent liquidation or administration? If so, did they take every step to minimise potential loss to creditors?
In Scotland, as elsewhere, wrongful trading claims have historically been less prolific than might have been anticipated. That may be changing. Officeholders are under increasing pressure to pursue recoveries and claims are often supported by litigation funding.
Two issues tend to dominate:
- Timing: When should the director have realised that there was no reasonable prospect of avoiding insolvency?
- Conduct: What steps were actually taken?
The latter is frequently determinative. Courts do not expect perfection. They do, however, expect evidence of rational, informed decision making.
What Does “Every Step” Look Like?
In practice, taking “every step” rarely means ceasing trade immediately. Indeed, a precipitate cessation may itself be criticised if it destroys value unnecessarily. Instead, directors should be able to demonstrate a structured approach to distress, including:
- Regularly updated cashflow forecasts
- Active engagement with professional advisers who are given full and accurate information
- Genuine attempts to restructure or, if appropriate, refinance
- Consideration of formal insolvency processes where appropriate
- Careful management of creditor payments (avoiding preferential treatment)
The inability to evidence these steps is often more damaging than the underlying commercial failure.
Challengeable Transactions and Transactional Risks
Alongside wrongful trading, company directors (especially those operating in the zone of insolvency) must be alive to other risks, particularly in the context of transactions entered into by the company.
The law on preferences and gratuitous alienations can give rise to challenges where assets are transferred or liabilities settled in a way that benefits certain creditors or connected parties. Transactions that may appear commercially sensible at the time (such as repaying a supportive creditor or restructuring intra group balances) can be recast, with the benefit of insolvency hindsight, as challengeable.
Again, the critical question is not simply what was done, but why. A defensible commercial rationale, properly documented, can make a material difference and meet the statutory or common law defences or at least give the liquidator or administrator pause for thought and potentially make a commercial settlement more likely.
The Role of Professional Advice
One of the clearest protective steps a director can take is to seek early and appropriate advice. From a risk perspective, the involvement of insolvency practitioners or solicitors serves two functions. Firstly, it should improve decision making in real time. Secondly, it creates an evidential record that decisions were taken with the benefit of independent input. This all presumes that full disclosure of all relevant information is made to the professional advisers.
That is not to say that reliance on advice provides a complete shield - it does not. Directors remain responsible for their decisions. But the absence of advice in a deteriorating financial position is often difficult to justify.
Trends and Looking Ahead
From a Scottish perspective, there is a discernible shift towards greater scrutiny of director conduct in distressed scenarios. That is being driven by a combination of factors: funding availability, creditor expectations and a more challenging economic environment.
We are also seeing more granular examination of financial information, particularly forecasts and management accounts. The days of relying solely on broad commercial judgment are, in many cases, behind us.
Practical Takeaways for Directors
For directors operating in the zone of insolvency, the following principles remain critical:
- Recognise the early warning signs: declining liquidity, creditor pressure and covenant stress all matter.
- Document decision making rigorously: contemporaneous records are often decisive.
- Engage with advisers early: both for substantive guidance and evidential protection.
- Avoid knee jerk transactions: particularly where they favour certain stakeholders.
- Keep outcomes under review: what is reasonable today may not be so in a matter of weeks.
The “zone of insolvency” is less a legal threshold than a practical reality. Directors are rarely given the benefit of perfect clarity at the time decisions are made. However, from the perspective of a liquidator or indeed the court, what matters is whether those decisions were informed, defensible and taken with proper regard to creditor interests. In an economic environment where financial distress is often gradual rather than sudden, that discipline is not simply advisable; it is essential.