Insolvency
What is Insolvency?
Insolvency occurs when a company can no longer meet its financial obligations as they fall due.
In simple terms, your business is insolvent when it cannot pay its debts or when liabilities exceed assets on the balance sheet.
Under UK law, once a company becomes insolvent, directors must prioritise creditors’ interests above all else.
Continuing to trade irresponsibly after this point can lead to personal liability or director disqualification under the Insolvency Act 1986.
Insolvency is when a business cannot pay its debts on time or its liabilities outweigh assets. Directors must act in creditors’ best interests immediately.
Types of Company Insolvency
| Insolvency Test | Description | Example |
|---|---|---|
| Cash Flow Test | When a company cannot pay its debts as they fall due. | Missed HMRC payments, unpaid supplier invoices. |
| Balance Sheet Test | When total liabilities exceed total assets. | Assets valued at £80,000 but debts total £120,000. |
A company that fails either test is insolvent. Directors should seek professional advice immediately from a licensed insolvency practitioner (IP).
Common Signs of Insolvency
Recognising early warning signs gives directors a greater chance of recovery.
Typical indicators include:
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Struggling to pay suppliers or HMRC on time.
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Regular use of short-term borrowing or director loans to cover expenses.
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Falling margins, overdue invoices, or creditor pressure.
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Consistently negative cash flow or reliance on personal funds.
If your company is showing any of these signs, act early. Speak to a regulated insolvency expert to understand your legal duties and available options.
What To Do If Your Company Is Insolvent
1. Stop and Assess
Directors must immediately assess the company’s position using up-to-date management accounts, balance sheets and cash flow forecasts.
2. Seek Professional Advice
Engage a licensed insolvency practitioner who can explain your legal obligations and outline rescue or closure options.
3. Avoid Wrongful Trading
Do not incur new debts or transfer assets at undervalue. These actions could later result in personal liability for directors.
📞 Speak to an advisor: 0800 088 2142 or start a Live Chat for confidential guidance.
Formal Insolvency Procedures
Depending on your company’s position, several regulated options may apply:
Company Voluntary Arrangement (CVA)
A CVA allows a company to continue trading while restructuring its debts.
This agreement is legally binding and provides breathing space to improve financial stability while making manageable monthly repayments to creditors.
Learn more in our detailed Company Voluntary Arrangement guide.
Administration
Administration protects a company from legal actions by creditors while attempting to restructure or sell the business.
This process can provide a pathway to recovery or an orderly wind-down.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation is initiated by directors when they recognize that the company cannot continue to trade.
Assets are sold to repay creditors, and the company is formally closed.
The Insolvency Act 1986 Explained
The Insolvency Act 1986 governs all UK corporate insolvency procedures.
It sets out the legal duties of directors and defines offences such as wrongful trading, fraudulent trading, and misfeasance.
Key takeaway: Directors who act responsibly, seek advice early and cooperate with insolvency practitioners rarely face penalties.
Consequences of Insolvency for Directors
When a company enters insolvency, directors’ conduct is reviewed by the appointed insolvency practitioner.
Possible outcomes:
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Overdrawn Directors’ Loan Account: You may be asked to repay personal borrowing from the company.
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Personal Guarantees: If you’ve signed one, creditors can pursue you personally.
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Director Disqualification: Misconduct may result in being banned from acting as a director for up to 15 years.
Can an Insolvent Company Be Saved?
Yes. Early intervention can often prevent liquidation.
Rescue options may include:
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Restructuring debts or reducing overheads.
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Refinancing through new investment or asset sales.
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CVA or Administration to secure temporary protection and allow recovery.
Many companies recover from insolvency with the right support. The sooner you act, the better your options.
How to Close an Insolvent Company
| Procedure | Initiated By | Description |
|---|---|---|
| Creditors’ Voluntary Liquidation (CVL) | Directors | Voluntary closure of an insolvent company. |
| Compulsory Liquidation | Creditors | Court-ordered winding up, usually following a winding-up petition. |
Tip: Voluntary liquidation is faster, less stressful, and helps directors stay compliant with their legal duties.
Get Expert Insolvency Advice Today
If you suspect your company is insolvent or struggling financially, don’t delay.
Speak to one of our licensed insolvency practitioners for compassionate, expert advice tailored to your situation.
By acting early, you can explore all available options and protect yourself from unnecessary risks.
Our Reviews
Would reccomend to all who need a bit of advice,,,,plus it was free and sent over documentation link to resolve our issue
10 outa 10
Would reccomend to all who need a bit of advice,,,,plus it was free and sent over documentation link to resolve our issue
10 outa 10
I have greatly appreciated your calm, straightforward support. My allocated Insolvency Administrator has been a reassuringly human part of a process that would otherwise have been very confusing and even more distressing than it already felt having to lose the company. Few of us study insolvency law in any depth since we rightly focus on the notion that our endeavours will be successful. Yet, when life's twists and challenges become unsurmountable, being able to turn to consummate professionals like Business Helpline for support has been of the greatest value. In times of need, these are people to trust. Thank you.
I have greatly appreciated your calm, straightforward support. My allocated Insolvency Administrator has been a reassuringly human part of a process that would otherwise have been very confusing and even more distressing than it already felt having to lose the company. Few of us study insolvency law in any depth since we rightly focus on the notion that our endeavours will be successful. Yet, when life's twists and challenges become unsurmountable, being able to turn to consummate professionals like Business Helpline for support has been of the greatest value. In times of need, these are people to trust. Thank you.
It would not have been possible without Steven and Stan guiding me through the whole process. Absolutely brilliant guys to have on your side if the need be.
I throughly recommend them to anyone. Five star treatment all the way through.
It would not have been possible without Steven and Stan guiding me through the whole process. Absolutely brilliant guys to have on your side if the need be.
I throughly recommend them to anyone. Five star treatment all the way through.
Highly recommended service, thank you Chris!
Highly recommended service, thank you Chris!
I strongly recommend Business Helpline and it is my intention to stay in contact with them, as my own business journey continues.
I strongly recommend Business Helpline and it is my intention to stay in contact with them, as my own business journey continues.
Insolvency FAQs
Who Gets Paid First in Insolvency?
Insolvency laws dictate the priority of payments:
- Secured creditors (e.g., banks with collateral).
- Preferential creditors (e.g., employee wages).
- Unsecured creditors.
Why Act Quickly in Insolvency?
Swift action increases the likelihood of business recovery or an orderly wind-down, reducing risks to directors.
What Are the Signs of Wrongful Trading?
Continuing to trade while knowing your company is insolvent could lead to wrongful trading claims.
For more detailed answers, visit our dedicated Insolvency FAQs section.
