Insolvency Advice for Directors: Key Considerations
Insolvency advice tells you whether the company can still pay its debts, what your options are if it cannot, and what that means for you as a director. Anyone can give it, but only a licensed insolvency practitioner can be appointed to run a formal procedure.
Your accountant may well be the first to see the problem, and they hold the figures and tax history any practitioner will need. If a formal procedure looks likely, the two work together on it.
The question that matters most is the one a liquidator asks later: from what date should the directors have known the company could not recover? That date matters. In a wrongful-trading claim, a director can be ordered to contribute to the losses creditors suffered after it.
Insolvency Advice at a Glance
In England, Wales and Scotland, the Insolvency Act 1986 controls who can act as office-holder, the person appointed to run a formal insolvency procedure. Only a licensed insolvency practitioner can take that role, apart from the official receiver in a compulsory liquidation.
Each practitioner is licensed by one of three bodies: the Insolvency Practitioners Association (IPA), the Institute of Chartered Accountants in England and Wales (ICAEW) or the Institute of Chartered Accountants of Scotland (ICAS). Each body keeps a register you can search by name.
Our first conversation with a director is free. Before you agree to anything with any firm, check that the practitioner is on the register, that the firm has no tie to your creditors that conflicts with your interests, and that the fee basis is in writing.
Quick Answer: When You Need Insolvency Advice
You need insolvency advice once you start choosing which creditor to pay this week. A company that cannot pay its debts as they fall due fails the cash-flow test of insolvency in section 123 of the Insolvency Act 1986.
You can reach that point before any creditor has sent a formal demand. A letter from HMRC about tax the company cannot pay in full is reason enough to take advice. A statutory demand for £750 or more that stays unpaid for 21 days is, by itself, proof under section 123 that the company cannot pay its debts.
When You Need a Licensed Practitioner
Your duties as a director change once the company is insolvent or close to it, or once liquidation or administration is probable. From then on you must weigh the interests of creditors, not only those of shareholders.
From that point, the advice you take needs to cover how each decision will look when an office-holder reviews it. If a formal procedure looks likely, that is the time to bring in a licensed practitioner alongside your accountant.
If the company needs a formal procedure, such as a company voluntary arrangement (CVA), an administration or a creditors’ voluntary liquidation (CVL), the directors or shareholders decide to start it. A licensed practitioner is then appointed to run it.
Main Director Risk From Late or Wrong Insolvency Advice
The risk with late advice is that the company keeps trading while its debts grow. The decisions a liquidator later questions are ordinary ones, made in that period.
Taking new credit can lead to a wrongful-trading claim. Paying a creditor you are connected to, or one whose debt you guaranteed, can be challenged as a preference, meaning a payment that put one creditor ahead of the others. Money drawn from the company leaves an overdrawn loan account, which the liquidator can ask you to repay.
What to Do Next About Insolvency Advice
Take our free insolvency test, then speak to a licensed insolvency practitioner before you take on more credit or pay one creditor ahead of the others. Keep your accountant involved. The practitioner will need the figures they hold.
How Serious Is Your Company’s Position?
Answer four short questions to see how urgent the situation may be and which options could fit your company’s circumstances.
Check my company’s positionSee your result online and receive a copy by email. We only call if you ask.
What Counts as Insolvency Advice in England and Wales?
Regulated vs Unregulated Insolvency Advice
Under sections 388 and 389 of the Insolvency Act 1986, it is an offence for anyone without a licence to act as an insolvency practitioner, apart from the official receiver. Advice given before any appointment has no such limit, so anyone can sell a “rescue plan”.
Some unlicensed firms are introducers. They pass the director on to a practitioner and take a fee for doing so. Ask anyone who advises you whether they hold a licence, and from which body. If they do not, ask who will be appointed, and how the adviser is paid.
Difference Between Tax, Restructuring and Insolvency Advice
The three overlap. A tax adviser looks at what the company owes HMRC and how to reduce it. Restructuring work changes the company’s debts, funding or ownership so that it can carry on.
Insolvency advice asks what happens if it cannot carry on, and which of your decisions will look reasonable when a liquidator, administrator or the official receiver reviews them. That review looks at the months before the appointment, which is why advice taken during those months matters.
When Free Insolvency Advice Is Enough
A free first call with a licensed practitioner, together with the free help from Business Debtline (0800 197 6026), can be enough while the company is still solvent. Use it to confirm that, then set a date to look at the figures again.
It is not enough once a winding-up petition is likely, a personal guarantee is at risk, or you have agreed a pause in payments with creditors that needs a proper record. At that stage you need written advice from a named, licensed practitioner.
Who Provides Insolvency Advice
Licensed Insolvency Practitioners
A licence belongs to a person, not a firm. It is granted under section 390A of the Insolvency Act 1986 through a recognised professional body, and you can check it on that body’s register.
Only a licensed practitioner can be appointed in a CVL, a members’ voluntary liquidation of a solvent company, an administration or a CVA.
Solicitors and Specialist Counsel
Insolvency solicitors deal with the legal disputes: a petition the company wants to contest, a claim about past transactions, or the defence of a director who already faces a personal claim. A barrister becomes relevant when a case goes to court.
Before any formal procedure, the practitioner normally comes first. A solicitor follows if you need to defend your own position.
Charities and Free Advice Lines
Business Debtline is the main free service for sole traders, partnerships and small limited companies. It will not act for you in a formal procedure. It will help you work through your figures and your options with HMRC.
If the business is sound and the cash shortage is short-term, that help may be all you need.
How to Choose the Right Insolvency Adviser
Verify the IP Licence Number Through the IPA, ICAEW or ICAS Register
Before you sign anything, find the named practitioner on the register of their licensing body: the IPA, the ICAEW or ICAS. Check that the licence is current and that no regulatory order applies to it.
Ask for the practitioner’s full name and licensing body in writing, and do not instruct a firm that will not give you both.
Ask About Time-Cost Schedule Before Engagement
Ask how the fee will be charged, and for an estimate in pounds for the procedure you are likely to need. A fixed fee tells you the cost at the start, so ask what it does not cover. A fee charged by the hour depends on how long the case takes.
In England and Wales, if a practitioner proposes to charge by the hour, the rules require a fees estimate to go to creditors before they approve the basis. It sets out hourly rates by grade of staff and the expected hours.
The office-holder cannot go over that estimate without approval from creditors, the creditors’ committee or the court. Ask to see the same detail before you instruct.
Test for Conflict of Interest With Existing Lender Relationships
Ask whether the practitioner works regularly for your bank, your invoice finance provider or your largest secured lender. That is not automatically a bar. The Insolvency Code of Ethics requires the practitioner to consider it and tell you about it before you instruct.
If the practitioner also acts as receiver for your lender, take the company’s advice from a different practitioner.
What Insolvency Advice Should Cover
Both Solvency Tests, With a Dated Conclusion
The advice should apply both tests in section 123. The cash-flow test asks whether the company can pay its debts as they fall due. The balance-sheet test asks whether its debts, including future and contingent ones, are more than its assets.
Failing either test makes the company insolvent under the Act. Ask for the conclusion in writing, with a date on it. If a liquidator later asks when you knew, a dated note of the advice and of what you did next is the evidence you will rely on.
Your Personal Exposure
Good advice looks at your personal position before it recommends a procedure for the company. At the first conversation we ask for a copy of every personal guarantee you have signed and the current balance of your director’s loan account.
We also look at payments made to connected creditors in the last two years, and at any assets sold for less than they were worth. HMRC can also make a director personally liable for unpaid National Insurance contributions in some cases.
A Written Recommendation (CVA, Administration or CVL)
At the end you should have a short written summary. It should say which procedure is recommended and why the others are not, the likely timetable, what creditors can expect, and what you need to do in the next 14 days.
Our guides to rescuing the business from insolvency and saving a struggling business explain the options in more detail. They do not replace advice on your own company.
Mistakes Directors Make Around Insolvency Advice
Waiting for the Next Quarter Without a Written View
Waiting for the next quarter’s figures can be a reasonable decision. The risk is waiting without a written view of whether the company is insolvent now, because the wrongful-trading test in section 214 of the Insolvency Act 1986 looks back at what the directors should have seen at the time.
If you decide to keep trading, write down why, and get a licensed practitioner’s view of that decision in writing.
Waiting for a Creditor Petition Before Calling an IP
Before a winding-up petition, the options include a Time to Pay arrangement (an agreement with HMRC to pay tax by instalments), a CVA, administration, a CVL, or trading on under closer control.
After a petition, they come down to paying or disputing the debt, an urgent rescue such as administration or a CVA, or compulsory liquidation. Directors can no longer appoint an administrator without going to court.
Payments out of the company’s money after the petition can be void under section 127 of the Act unless the court approves them. Banks commonly freeze the account once the petition is advertised.
Our guide to dealing with creditor pressure covers the decisions before that point.
Frequently Asked Questions About Insolvency Advice
Is the first call with an insolvency practitioner really free?
It should be. A first conversation with a licensed practitioner should tell you whether the company is solvent, show your personal exposure and set out the options. At Company Debt, fees only start once you instruct us on a formal procedure. If a firm wants payment before that first conversation, speak to another practitioner.
Does seeking insolvency advice automatically lead to liquidation?
No. Advice can end with a Time to Pay arrangement with HMRC, an informal agreement with creditors, or a CVA instead of a liquidation. Which one fits depends on whether the business can pay its way in future. We will tell you if liquidation is not the right route.
How does taking insolvency advice protect me from wrongful trading claims?
Section 214(3) of the Insolvency Act 1986 gives directors a defence where, from the point they knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration, they took every step they ought to have taken to minimise creditors’ losses.
A dated record that you took licensed advice and acted on it is good evidence for that defence. The liquidator must report on the directors’ conduct to the Insolvency Service, and that report feeds into any decision about disqualification.
Should I keep my accountant during insolvency advice?
Yes, and bring them in early. The accountant has the historic figures and the tax position, and the practitioner needs both. The practitioner advises on any formal procedure and is the one appointed to run it, so the two roles fit together.
When should I switch insolvency advisers?
Change adviser if the practitioner will not give you their licence details, will not explain in writing how fees will be charged, or did not tell you about a regular working relationship with your lender. A second opinion before any formal appointment is normal, and a regulated practitioner should not object to it.
Check How Serious the Position May Be
Answer four short questions to see how urgent the situation may be and which broad options could fit.
Check my company’s positionEstimates are fineWe only call if you ask us to
Related Guides on Insolvency Advice
- How to save a struggling business: what to do before a formal procedure is needed.
- Rescue your business from insolvency: the formal rescue procedures and when each one fits.
- Business recovery services: what a licensed practice does at each stage of a recovery.
- What is an insolvency practitioner?: how to choose and check a licensed practitioner.
- Insolvency Act 1986: the main statute, section by section, including section 388 on who can act.
