Company insolvency occurs when a business is unable to meet its financial obligations, meaning it cannot pay its debts when they are due. This state of financial distress can have serious consequences for all stakeholders, including creditors, employees, and directors.

This article aims to provide an initial overview of company insolvency, including its legal ramifications and its impact.

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What is Company Insolvency?

Insolvency means that the business’s liabilities (or debts) outweigh its assets, or that the company can no longer pay bills when they fall due.

Insolvency can be caused by a number of factors, including poor financial planning, economic downturns, lawsuits, or the loss of a major client or contract.

If a company is declared insolvent, its directors must shift their focus to creditors and cease trading. They will also need to seek professional advice and enter a formal insolvency process.

Insolvency can have a significant impact on everyone involved, including creditors, employees, and directors. Creditors may lose some or all of the money that they are owed by the company. Employees may lose their jobs, and they may also have difficulty getting their wages and other employment benefits paid. Directors may be held personally liable for the company’s debts if they are found to have been negligent or reckless in their duties.

Is Business Insolvency the Same Thing as Bankruptcy?

No, insolvency is not the same thing as bankruptcy. Insolvency is the financial state where a person or a company cannot pay their debts when they are due. Bankruptcy is a legal process that happens when an individual declares that they cannot meet their financial obligations. A company can’t go bankrupt in the UK; instead, it goes through processes like liquidation or administration.

When is a Company Considered to be Insolvent?

There are two main tests for insolvency:

Cash flow test: A company is insolvent if it is unable to pay its debts as they fall due, even if its assets exceed its liabilities on paper. This means that the company has enough assets to cover its debts, but it does not have enough cash available to pay them off.

Balance sheet test: A company is insolvent if its liabilities exceed its assets, meaning that its total debts are greater than its total assets. This means that the company does not have enough assets to cover its debts.

What Might Cause My Business to Become Insolvent?

There are a number of warning signs to watch out for you if you’re concerned your company may be approaching a state of insolvency.

  • Difficulty Paying Suppliers and Employees: If you’re struggling to make payments to your suppliers or pay your employees, this is a warning sign.
  • Increasing Debt Levels: A consistent rise in your company’s debt is cause for concern.
  • Decreasing Sales and Profits: A drop in sales or profits can be indicative of financial instability.
  • Negative Cash Flow: If your company is spending more money than it’s bringing in, this is a clear sign of financial distress.
  • Inability to Obtain New Financing: Struggling to secure loans or attract investors can make it challenging to improve your financial situation.
  • Late or Partial Payments to Creditors or HMRC: Regular delays or incomplete payments can be a red flag.
  • Legal Actions: The presence of a County Court Judgment (CCJ) or a statutory payment demand against your company should prompt immediate action.
  • Lack of Operational Funds: If you can’t cover basic operating expenses, it’s a clear sign you’re in financial trouble.
  • Persistent Creditor Pressure: If banks, HMRC, or other creditors are continuously contacting you for overdue payments, take it seriously.
  • Maxing Out Credit: If you’re borrowing the maximum allowed from banks or suppliers, it indicates a reliance on external financing.
  • Unpaid Director Salaries: If the directors aren’t receiving their salaries due to lack of funds, this is another serious warning sign.

What Does Business Insolvency Mean for You?

If your company is insolvent, it is a pivotal moment that demands immediate and focused action from you as a director. You have two main options: either aim to rescue the company or initiate an orderly closure. Both options legally require the involvement of an insolvency practitioner.

  1. Rescuing the Company: If you think the financial difficulties are temporary, then you may opt for rescue mechanisms like a Company Voluntary Arrangement (CVA) or administration. In a CVA, you can negotiate reduced payments to creditors, while administration provides a breathing space from creditors and may allow the company to continue operating. An insolvency practitioner is mandatory to formalize and supervise both these processes.
  2. Orderly Closure: If recovery is not feasible, you must consider winding down the business in a manner that is fair to all creditors. Liquidation is the standard course of action in this scenario, where the company’s assets are sold to repay debts. Again, an insolvency practitioner must oversee this process to ensure it’s carried out legally and ethically. All debts end with the closure of the company.

What to Do if Your Company is Insolvent?

A diagnosis of insolvency comes with immediate and significant implications for the business and its stakeholders. Here’s what you need to know:

  1. Director’s Responsibilities Change – In insolvency, a director’s primary responsibility shifts away from shareholders and towards creditors. Every action must demonstrate this is understood.
  2. You should cease trading – A company that is insolvent must cease trading or risk accusations or ‘wrongful trading’ further down the line.
  3. You should seek professional advice: It is important for company directors and shareholders to seek professional advice from an insolvency practitioner or other qualified advisor as soon as possible. This can help assess the insolvency’s severity and identify potential options for addressing the situation.
  4. You may need to enter a formal insolvency process: In some cases, a formal insolvency process, such as administration or voluntary arrangement, may be necessary to protect the company from legal action and provide a framework for restructuring or winding down the business.

Ultimately, the key to managing insolvency for a company is to take proactive steps to address the situation as soon as possible. This may involve seeking professional advice, engaging with creditors, and exploring all available options for restructuring or winding down the business.

Immediate Steps When Facing Insolvency

  1. Review the company’s financial documentation to understand the extent of the financial difficulties.
  2. Consult with an insolvency practitioner for professional advice on the company’s position.
  3. Hold a board meeting to discuss the situation and document all decisions made.
  4. Inform creditors about the company’s financial situation if legally advised to do so.
  5. Cease trading if insolvency is confirmed to avoid wrongful trading charges.
  6. Consider the company’s options, such as restructuring, administration, or liquidation.
  7. Ensure that all actions taken are in the best interests of the creditors.
  8. Keep accurate records of all transactions and decisions from the point of suspected insolvency.

Insolvency Processes

Corporate insolvency processes in the UK offer different approaches for companies that are unable to pay their debts, each catering to specific circumstances and outcomes.

  1. Administration: An expert steps in to run the company, trying to save it or at least pay off some debts by selling the business or its assets.
  2. Company Voluntary Arrangement (CVA): The company makes a deal with its creditors to pay back debts over time and keeps running its business.
  3. Creditors’ Voluntary Liquidation (CVL): The company’s directors choose to close the business because it can’t pay its debts. The assets are sold to pay off creditors.
  4. Compulsory Liquidation: This happens when a court orders the company to close because it can’t pay its debts. An expert sells the assets to pay the creditors.
  5. Receivership: A receiver is appointed, usually by a lender, to take control of certain assets of the company and sell them to pay back what the company owes to that lender.

What are the Consequences of Business Insolvency?

Insolvency can have serious consequences for a company and its stakeholders, including creditors, directors, employees, and shareholders.


  • May lose all or part of the money owed to them
  • May have to wait longer to get paid
  • May lose collateral or security interests


  • May be personally liable for company debts
  • May be restricted from serving as a director in the future
  • May experience reputational damage


  • May lose their jobs
  • May not be paid their wages
  • May lose benefits and retirement plans


  • May lose their investment
  • May lose voting rights
  • May receive no equity after liquidation

Indirect consequences:

  • Damage to company reputation
  • Loss of investor and lender confidence
  • Increased stress and anxiety for employees and directors
  • Legal and financial costs associated with the insolvency process

Do I Need an Insolvency Practitioner if my Company is Insolvent?

Yes, if your company is insolvent and you are considering formal insolvency procedures such as a Company Voluntary Arrangement (CVA), administration, or liquidation, the involvement of an insolvency practitioner is legally required.

An insolvency practitioner serves as an impartial expert who will formalize and supervise the chosen insolvency process. They have a legal obligation to act in the best interests of all creditors and ensure the process complies with UK insolvency law.

Whether you’re looking to rescue the company or proceed with an orderly closure, an insolvency practitioner provides the necessary guidance and oversight to ensure that you’re fulfilling your legal and ethical obligations as a director.

What Are the Options for an Insolvent Company?

If your company is insolvent, immediate action is required to address the financial difficulties. As a director, you have several formal and informal options at your disposal, all aimed at either rescuing the business or ensuring an orderly closure.

Here are the primary options:

  1. Company Voluntary Arrangement (CVA) – A CVA allows you to negotiate a reduced debt repayment plan with creditors over a fixed period, usually 3 to 5 years. An insolvency practitioner drafts the proposal, presents it to creditors, and supervises its implementation upon approval. » MORE Read our full article on CVA
  2. Administration – This option offers protection from creditors while a plan is developed for either business recovery or asset sale. The insolvency practitioner acts as the administrator and takes control of the company during this period. » MORE Read our full article on Administration
  3. Creditors’ Voluntary Liquidation (CVL) – If there is no realistic prospect of business recovery, a CVL enables the liquidation of company assets to repay creditors. An insolvency practitioner oversees this process as the liquidator. MORE Read our full article on CVL
  4. Compulsory Liquidation – Initiated usually by creditors, this court-based procedure leads to the liquidation of the company’s assets. An insolvency practitioner is appointed by the court to act as the liquidator. MORE Read our full article on Compulsory Liquidation
  5. Informal Creditors’ Arrangement – This is an informal agreement between the company and its creditors to restructure debt. While not legally binding, it can offer short-term relief and doesn’t require an insolvency practitioner.
  6. Time to Pay (TTP) Arrangement – Specifically aimed at tax debts, a TTP allows you to negotiate with HMRC to pay your tax liabilities in instalments over an extended period. This is also an informal arrangement but has significant implications for ongoing tax compliance. MORE Read our full article on TTP
  7. Refinancing Options
    You may consider refinancing existing loans or seeking new lines of credit to improve liquidity. This can be through bank loans, asset financing, or attracting new investment.

Expert Advice is a Click Away

If you need help understanding the best way forward for your company, use the live chat during working hours, or call us on 0800 074 6757. We’ve helped 1000’s of directors navigate difficult financial circumstances.

Business Insolvency FAQ’s

Trading whilst insolvent could lead to personal liability and disqualification as a director. It is illegal to keep operating without addressing insolvency.

It depends on the complexity of the case and the options pursued. Liquidation can take 6-12 months. Administration or voluntary arrangements may take longer if restructuring the company.

Yes, it is possible to turn around an insolvent business through restructuring debt, asset sales, or via administration. But outcomes vary case-by-case.

The order of priority for repaying creditors is: secured, preferential, unsecured, and shareholders. Creditors must be paid in this order.

In some cases, a company can continue to trade if the directors believe they can restore the company’s solvency and have taken appropriate advice. However, this must be done with caution to avoid wrongful trading, which could have legal repercussions for the directors.

For companies with temporary cash flow problems, options include negotiating extended payment terms with creditors, seeking short-term financing, or invoice factoring. If the business is fundamentally viable, arrangements like a CVA or refinancing assets may provide the necessary breathing space to improve liquidity.

Insolvency can lead to the termination of ongoing contracts, as many agreements include clauses that allow for termination in the event of insolvency. However, during certain insolvency procedures like administration, there may be some protection to prevent contracts from being automatically terminated.

While insolvency does not automatically prevent directors from starting another business, they may face restrictions if found guilty of wrongful or fraudulent trading. Additionally, they cannot use a name associated with the insolvent company for a new business without court permission.

A company that exits insolvency through a restructuring or a formal arrangement such as a CVA often emerges as a leaner entity with reduced debts. However, its credit standing would typically be impaired for some time, affecting its ability to secure future financing and potentially influencing its trade terms with suppliers and customers.

Yes, a director can be disqualified from managing or directing a company for up to 15 years if they are found to have engaged in unfit conduct, such as allowing a company to trade while insolvent, not keeping proper accounting records, or not acting in the company’s best interest.