A company facing serious financial pressure may still be able to avoid liquidation, provided the underlying business remains viable and action is taken early enough.
The right solution depends on why the company is struggling, how severe its debts are, whether it can return to sustainable trading and how much creditor pressure it is facing.
Options can range from improving cash flow and negotiating with creditors to formal rescue procedures such as a Company Voluntary Arrangement (CVA) or administration.
If the business is no longer viable, however, delaying liquidation may simply increase the losses suffered by creditors.
Quick Answer
Quick Answer: A company may be able to avoid liquidation if the underlying business is still viable. Options can include improving cash flow, negotiating with creditors, agreeing an HMRC Time to Pay arrangement, refinancing, entering a CVA or using administration. If there is no realistic route back to sustainable trading, liquidation may instead be the appropriate course.
Can an insolvent company avoid liquidation?
Potentially, yes.
Insolvency does not automatically mean a company must immediately be liquidated.
A business may be experiencing serious financial difficulties but still have:
- profitable underlying operations
- a strong order book
- valuable customers or contracts
- assets that could release working capital
- temporary rather than permanent cash-flow problems
- creditors willing to negotiate
- access to realistic funding or restructuring
The key question is whether there is a credible route back to financial stability.
If the company is continually losing money and has no realistic prospect of paying its debts, attempts to delay liquidation can make matters worse.
Directors of an insolvent company must consider creditors’ interests and should take care not to worsen their position. See our guide to director duties when facing insolvency.
Warning signs you need to act quickly
The sooner financial problems are addressed, the more options are generally available.
Warning signs can include:
- persistent cash-flow shortages
- VAT, PAYE or Corporation Tax arrears
- suppliers refusing further credit
- missed loan repayments
- inability to pay wages
- County Court Judgments
- statutory demands
- creditor threats or legal action
- increasing reliance on short-term borrowing
- a winding-up petition being threatened
If several of these are happening at once, the priority should be establishing whether the company remains viable rather than simply finding enough money to survive another few weeks.
1. Improve cash flow and stop losses
For businesses with fundamentally sound operations, relatively straightforward changes can sometimes prevent a temporary cash-flow problem becoming a full insolvency crisis.
This may include:
- collecting overdue customer debts more aggressively
- reducing unnecessary expenditure
- renegotiating supplier terms
- disposing of non-essential assets
- reviewing unprofitable products or contracts
- reducing stock levels
- improving invoicing and credit-control procedures
The aim should not simply be to generate a short-term cash injection.
Any restructuring needs to leave the company capable of paying both existing debts and future liabilities as they fall due.
2. Negotiate with creditors
Creditors may prefer an affordable repayment arrangement to forcing an otherwise viable company into liquidation.
Depending on the situation, it may be possible to agree:
- extended payment terms
- temporary reduced payments
- repayment plans
- revised contractual arrangements
However, informal agreements do not necessarily prevent other creditors from taking enforcement action.
Directors therefore need to understand whether negotiations provide a genuine solution or are simply postponing a wider insolvency problem.
3. Consider an HMRC Time to Pay arrangement
If tax arrears are the main cause of financial pressure, HMRC may agree to allow the company to repay what it owes through instalments.
A Time to Pay arrangement is assessed according to the company’s circumstances rather than being subject to one standard repayment period.
HMRC will consider whether the proposed arrangement is realistic and affordable and whether the company can keep up with its future tax obligations.
Time to Pay can therefore be useful for an otherwise viable business facing a temporary tax debt, but it will not normally solve a fundamentally unviable business.
4. Restructure or refinance the business
Additional finance may help where there is a genuine short-term funding gap and the company can afford the resulting repayments.
Possible sources could include:
- invoice finance
- asset-based lending
- asset refinance
- shareholder investment
- other commercial lending
Refinancing should be approached cautiously if the business is already insolvent.
Borrowing more money does not rescue a company unless the underlying business can generate sufficient cash to service the new debt.
Where appropriate, directors may want to explore business funding alongside wider restructuring rather than treating borrowing as a solution on its own.
5. Use a Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that can allow a viable but insolvent company to continue trading while repaying creditors under an agreed arrangement.
A CVA proposal requires approval from at least 75% by value of creditors who vote. If approved, directors normally retain control of the business while the arrangement is supervised by an insolvency practitioner.
A CVA may be appropriate where:
- the core business remains profitable
- historic debts have become unmanageable
- future cash flow can support the proposed payments
- creditors are likely to receive a better outcome than through liquidation
It is not suitable for every insolvent company, particularly where there is no realistic prospect of sustainable trading.
6. Consider administration
Company administration is a formal insolvency procedure that may be used where a company or its business has sufficient value to preserve.
The administrator’s primary objective is to rescue the company as a going concern. If that is not reasonably achievable, they may seek a better result for creditors than immediate liquidation or, in certain circumstances, realise assets for secured or preferential creditors.
Administration can also provide protection from certain creditor enforcement while the administrator considers the company’s future.
It tends to be more appropriate where there is a substantial business, valuable contracts, employees, assets or a viable operation worth protecting.
What about pre-pack administration?
A pre-pack administration involves arranging the sale of all or part of a company’s business or assets before the administrator is formally appointed, with the sale taking place shortly after appointment.
It can sometimes preserve the underlying business and jobs, but it is not simply a way for directors to move the business into a new company.
Where a substantial disposal is made to a connected person within the first eight weeks of administration, specific independent-scrutiny requirements apply. This may involve creditor approval or an evaluator’s report.
See our guide to pre-pack administration for more information.
When is liquidation the better option?
Avoiding liquidation should not become the objective at any cost.
There comes a point where attempts to rescue a company may simply increase creditor losses.
Liquidation may be appropriate where:
- the company has no realistic path back to profitability
- debts continue increasing
- the company cannot meet ongoing liabilities
- funding would merely postpone failure
- major contracts or customers have been permanently lost
- rescue proposals are not financially viable
In those circumstances, a Creditors’ Voluntary Liquidation allows the insolvent company to be wound up through a formal process.
Choosing CVL does not erase previous director conduct or automatically remove personal liabilities such as guarantees. It simply provides a structured process for dealing with the insolvent company.
How late is too late to avoid liquidation?
There is no single point that applies to every company.
However, options tend to narrow as creditor enforcement progresses.
A company dealing with early cash-flow problems generally has more rescue options than one already facing statutory demands or a winding-up petition.
If a winding-up petition has already been presented, directors should seek advice urgently because court proceedings can significantly restrict what can realistically be done.
The most important thing is therefore not to wait until the company has run out of cash completely before assessing its options.
Speak to Business Helpline
If your company is struggling financially, the first question should be whether the underlying business can realistically be rescued.
Our licensed insolvency practitioners can review:
- cash flow
- company debts
- HMRC arrears
- creditor pressure
- assets and funding
- whether a CVA is viable
- whether administration may be appropriate
- whether liquidation has become unavoidable
Where rescue is realistic, we can explain the available options. Where it is not, we can also explain the implications of Creditors’ Voluntary Liquidation.
Call Business Helpline on 0800 088 2142 for free, confidential advice.
Avoiding Liquidation FAQ
Can a company recover from insolvency without liquidation?
Yes. Some insolvent companies can recover through restructuring, improved cash flow, creditor agreements, refinancing or formal rescue procedures such as a CVA or administration.
Can HMRC stop a company going into liquidation?
HMRC may agree a Time to Pay arrangement where the company can make realistic and affordable repayments. This can sometimes prevent tax arrears escalating, but approval depends on the circumstances.
Can a CVA stop liquidation?
A viable company may use a CVA as an alternative to liquidation. It requires creditor approval and the company must be capable of making the proposed payments.
Does administration stop liquidation?
Administration is intended to pursue statutory rescue or creditor objectives and can prevent an immediate winding up while the administrator deals with the company. The ultimate outcome may still include liquidation if rescue is not achievable.
Should I borrow money to avoid liquidation?
Only where additional borrowing forms part of a realistic recovery plan and the company can afford the repayments. Adding more debt to an unviable company can worsen the position.
What happens if the company cannot be rescued?
If there is no realistic prospect of recovery, CVL may provide an orderly way to close the insolvent company and deal with its assets and creditors.
