Directors Exposed to Personal Liability in the Twilight Period (Insolvency Act 1986)

The “twilight period” is a commonly used, non-statutory expression for the period in which a company is in financial difficulty and directors’ decisions may later be scrutinised in an insolvency process. In practice, the relevant legal issues usually concern wrongful trading under section 214 of the Insolvency Act 1986, the duty to consider creditor interests as the company’s financial position deteriorates, and the treatment of particular transactions entered into before insolvency. Authorities such as BTI 2014 LLC v Sequana SA [2022] UKSC 25 show that directors should monitor the company’s financial position carefully, take timely advice where appropriate, and document the reasons for significant decisions. Directors who continue trading without properly assessing the impact on creditors may face substantial personal and legal risk.

What is Twilight Period?

The “twilight period” is an informal, non-legal term used to describe the stage when a company is nearing insolvency or facing financial difficulties.Although not expressly defined in statute, it is generally recognised through case law interpreting directors’ duties under both the Insolvency Act 1986 and the Companies Act 2006.

During this phase, directors often attempt to rescue the business, managing cashflow, negotiating with creditors, and securing additional funding. However, such actions may later be challenged if they worsen the position of creditors. The courts will assess whether directors knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation and whether they took every step to minimise potential losses.

Directors frequently underestimate the legal significance of this period, continuing operations without properly recognising the need to monitor the company’s financial position, consider creditor interests where appropriate, and take timely professional advice.

Key Findings in Twilight Period Cases

Breach of Director Duties

Where a company is insolvent, bordering on insolvency, or where insolvent liquidation or administration is probable, directors must give appropriate and increasing weight to creditor interests as part of their decision making, rather than treating shareholder interests as automatically prevailing.

This reflects the position clarified by the Supreme Court in BTI 2014 LLC v Sequana SA, which confirmed that the creditor duty is not triggered by a single bright line test, but develops as the company’s financial position deteriorates. As the company’s financial position deteriorates, creditor interests carry increasing weight and may become decisive where insolvent liquidation or administration is probable or imminent.

Failure to recognise and respond appropriately to this shift may amount to a breach of duty, particularly where directors continue to trade in a manner that increases losses to creditors. In assessing liability, courts will examine both the knowledge of the director and the reasonableness of their actions in the circumstances.

Wrongful Trading Liability

Under section 214 of the Insolvency Act 1986, a court may order a director to contribute to the company’s assets where the director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and failed to take every step reasonably open to them to minimise potential loss to creditors. In determining liability, the court applies both subjective and objective standards, considering what the director actually knew as well as what would reasonably have been expected of a person carrying out the same functions. This should be distinguished from fraudulent trading under section 213 of the Insolvency Act 1986, which requires an intention to defraud creditors or a fraudulent purpose and involves a higher evidential threshold.

Courts Focus on Steps Taken, Not Just Belief

Assertions of good faith alone are unlikely to assist where the evidence shows that creditor losses increased and the directors failed to take every step reasonably open to them to minimise loss. Directors should be able to show that they took concrete and reasonable steps in response to the company’s financial position

Scrutiny of Transactions

Transactions entered into before insolvency, particularly preferences under section 239 and transactions at an undervalue under section 238 of the Insolvency Act 1986, are open to detailed scrutiny. Payments to connected parties and unusual asset transfers may be particularly vulnerable to challenge, depending on the circumstances and the statutory requirement.

Implications of Twilight Period Judgements

These authorities show that courts will closely examine director decision making during financial distress, particularly where losses to creditors may have been increased. In practice, this means directors should monitor the company’s financial position carefully, take advice where appropriate, and keep clear records of significant decisions.

The importance of contemporaneous records is significant. Directors who fail to record the reasoning behind their decisions may find it difficult to defend claims, even where intentions were genuine. This aligns with wider expectations of corporate accountability and transparency. Conduct in the period before insolvency may also give rise to related issues, including disputes involving HMRC and claims for misfeasance. In some cases, the same underlying events may also lead to claims against professional advisers, depending on the facts and the duties owed.

Ultimately, these cases reinforce a key principle: delay in recognising insolvency risk and taking appropriate action significantly increases personal exposure. The application of these principles is highly fact-specific and depends on the financial position of the company and the conduct of its directors. Directors should seek specialist legal representation to prevent exposure.

Defending Director Claims

A robust defence to wrongful trading or misfeasance claims requires a structured and evidence-based approach. Directors should seek early forensic accounting analysis where appropriate to assess whether losses genuinely increased as a result of continued trading. Evidence that there was a credible prospect of recovery, supported by financial forecasts, restructuring efforts, or professional advice, may be important. It may also assist if directors can show that they obtained and followed appropriate professional advice at the relevant time.

In more complex or high-value disputes, funding arrangements, litigation strategy, and the quality of contemporaneous records may also affect how claims are pursued and defended.

Strategic insight can also be gained from resources such as a legal guide to defending claims from litigation funders, particularly in complex, high-value disputes where third-party funding is involved.

Instruct Expert London Litigation Lawyers

LEXLAW Solicitors & Barristers are specialist litigation lawyers based at Middle Temple, London, with extensive experience advising directors and businesses facing financial distress and insolvency-related risk. Our team regularly acts in complex wrongful trading, misfeasance, and director liability claims, providing strategic guidance from early-stage risk assessment through to High Court proceedings.

We understand the legal and commercial pressures directors face during the period leading up to insolvency, including HMRC engagement, creditor actions, and governance challenges. Our approach combines technical expertise with practical, commercially focused advice to help mitigate exposure and protect our clients’ position.

As demonstrated in LEXLAW’s experience advising on wrongful trading and director liability claims, timely legal intervention may be an important factor in mitigating or avoiding liability altogether. Contact now for urgent legal advice!