If a company can’t pay its debts, it faces serious legal and business challenges. Being unable to pay bills or loans can disrupt how your company operates and may lead to legal action.

This situation could affect your company’s reputation, its relationships with suppliers, and its overall stability. It may also trigger a series of regulatory requirements and proceedings aimed at resolving the debt issue, which could range from renegotiating terms with creditors to filing for company bankruptcy.

What Happens if a Company Cannot Pay its Debts

What Happens if a Limited Company Can’t Afford to Pay its Debts?

What options does my limited company have if struggling with debt to creditors?

If your limited company can’t afford to pay its debts, it is your responsibility as a director to cease trading immediately. Continuing to trade while insolvent can lead to accusations of wrongful trading, potentially resulting in personal liability for company debts and disqualification from directorship.

Your first step should be to seek professional advice from a financial advisor or licensed insolvency practitioner such as ourselves. We can assess your company’s financial situation and advise on the best course of action. This might include exploring options for company rescue, such as restructuring, refinancing, or negotiating with creditors.

You should also communicate transparently with creditors. Informing them of the company’s situation and discussing potential payment arrangements can sometimes provide temporary relief and prevent further action from creditors, like winding up petitions.

It’s important to document all decisions and actions taken during this period. This documentation can provide evidence that you acted responsibly and in the best interest of the creditors, which is crucial should the company’s financial situation come under legal scrutiny.

Finally, you may need to consider formal insolvency procedures like administration or liquidation if the company cannot be rescued. These processes should be handled by qualified professionals to ensure they are conducted legally and ethically.

We explain these procedures in more detail below:

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a legally binding agreement between a company and its creditors. It allows the company to pay off a portion of its debts over an extended period, typically 3-5 years. During this time, creditors cannot take legal action against the company as long as it adheres to the agreed-upon terms. A CVA can offer a lifeline for businesses that believe they can return to profitability but need some time to restructure.


Administration is a process where a licensed insolvency practitioner takes control of a company to either rescue it as a going concern, sell its assets to repay creditors, or wind it down in an orderly manner. While a company is in administration, it is protected from legal actions by creditors, allowing time for the best possible outcome for both the company and its creditors.

Pre-pack Administration

A subset of the administration process, pre-pack administration involves selling the assets of a company before appointing administrators. This is typically arranged behind closed doors and executed swiftly to preserve the business’s value. Pre-pack administration aims to achieve a better result for creditors than would be possible through immediate liquidation.

Creditors’ Voluntary Liquidation (CVL)

In Creditors’ Voluntary Liquidation, the directors of a company voluntarily decide to bring the business to an end due to insolvency. An insolvency practitioner is appointed to sell off the company’s assets and distribute the proceeds among the creditors. This option is generally considered when it is clear that the business has no viable future.

Compulsory Liquidation

Compulsory liquidation is initiated by creditors through a court order when a company is unable to pay its debts. In this process, a liquidator is appointed by the court to sell the company’s assets and distribute the proceeds to creditors. Unlike other options, compulsory liquidation is often considered a last resort, usually triggered by a creditor’s formal demand for payment not being met.

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What are the Likely Consequences of Your Company Not Paying its Debts or Creditors?

The consequences of your company not paying its debts will depend on a number of factors, including the amount of debt owed, the type of creditors involved, and the steps that your creditors take to recover their debts.

Some of the most common consequences of not paying debts include:

  • Legal action. Your creditors may take legal action against your company to recover their debts. This could involve sending you letters of demand, filing a court claim, or even obtaining a judgment against your company.
  • Damage to your credit rating. If your company fails to pay its debts on time, this will damage your credit rating. This could make it more difficult and expensive to borrow money in the future.
  • Loss of suppliers and customers. Suppliers and customers may be reluctant to do business with a company that has a poor credit rating. This could lead to a loss of business and revenue.
  • Insolvency. If your company cannot pay its debts, it may become insolvent. This means that your company will not be able to continue trading and will need to be wound up.

In addition to these general consequences, there may also be specific consequences for you as a director of the company. For example, if your company fails to pay its debts because of wrongful trading, you may be held personally liable for the company’s debts.