For two reasons; firstly by continuing to trade and to incur debts when there is no realistic prospect of the company avoiding insolvent liquidation - this is called wrongful trading. In such circumstances directors may be required to contribute personally towards the losses of the creditors.

The second area covers creditor payments, when a firm experiences financial difficulty. In many instances, directors have preferred to pay trade creditors i.e. PAYE/NIC and VAT to accrue. Although directors may believe that it is beneficial for trade creditors to be paid first to enable the company to trade, this course of action is entirely contrary to Insolvency Legislation under the regulations relating to preferences. Many directors are unaware of their obligations under the Insolvency Act 1986.

In both of the above circumstances, directors may be required to contribute personally towards the losses and may be disqualified from acting as a director. A director's duty, when a company approaches insolvency is to act in the best interests of the creditors of the company. It is therefore very important for company directors to ensure they are continually up to date with the company's financial position and to seek advice when encountering problems.