With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
A supplier has just warned that it will “make your company bankrupt” unless payment reaches them by Friday. Take a breath. In UK law, a limited company cannot be made bankrupt. Bankruptcy applies only to individuals.
The distinction matters because the legal procedures, director duties and personal consequences are completely different for companies and individuals. This guide explains the correct routes when a company becomes insolvent, when directors’ personal assets may be at risk and what steps to take before legal action escalates.
A company becomes insolvent if it fails either of two legal tests recognised under UK insolvency law. Insolvency itself is a financial condition, not a procedure. Formal processes such as liquidation or administration only begin when action is taken.
Cash-flow insolvency
This test asks a simple question: can the company pay its debts as they fall due?
Missed rent, unpaid HMRC liabilities or suppliers refusing further credit may indicate cash-flow insolvency. Even if the company’s balance sheet still shows positive assets, a persistent inability to meet obligations on time may mean the company is insolvent.
Courts may rely on evidence such as unpaid judgments or a statutory demand that has not been satisfied within 21 days when assessing inability to pay debts.
Balance-sheet insolvency
Balance-sheet insolvency occurs when a company’s liabilities exceed its assets.
This includes not only current debts but also contingent liabilities and future obligations. A company may appear operational while still being technically insolvent if its debts exceed the value of its assets.
Spotting either test early matters because, once insolvency occurs, directors must prioritise the interests of creditors rather than shareholders.
Why a limited company cannot be “bankrupt”
In UK law, bankruptcy is a formal legal process that applies only to individuals.
Official government guidance explains that bankruptcy is a way for individuals to deal with debts they cannot pay and does not apply to companies. When a company cannot pay its debts, it may enter liquidation, administration or a Company Voluntary Arrangement instead.
The distinction exists because a company is a separate legal entity. When a company enters liquidation or administration, control passes to an insolvency practitioner or the Official Receiver, who manages the company’s assets for the benefit of creditors.
Directors’ personal assets normally remain separate from the company’s assets. However, personal liability may arise if directors have signed personal guarantees or if a court finds misconduct such as wrongful trading.
Limited Liability Partnerships follow the same principle. An LLP can be wound up but cannot be declared bankrupt.
Insolvency vs bankruptcy at a glance
Although both processes deal with unpaid debts, they apply to different legal entities and follow different procedures.
Company cannot pay debts or liabilities exceed assets
Individual unable to pay debts
Court or out-of-court routes
Both: voluntary procedures or court-ordered liquidation
Debtor online application or creditor petition
Who controls assets
Licensed insolvency practitioner or Official Receiver
Official Receiver or trustee in bankruptcy
Typical duration
Varies depending on asset recovery
Discharge usually after about 12 months
Main restrictions
Directors’ conduct investigated
Cannot act as director without court permission
Public record
Companies House status and Gazette notices
Individual Insolvency Register
Key takeaways
A company cannot be made bankrupt.
Insolvent companies use procedures such as liquidation, administration or a CVA.
Bankruptcy applies only to individuals and affects personal assets and legal rights.
When insolvency triggers new duties and personal risk
When a company becomes insolvent, directors’ legal duties shift toward protecting creditors.
Continuing to trade when directors know, or ought to know, that the company cannot avoid insolvent liquidation may result in a wrongful trading claim under section 214 of the Insolvency Act 1986. Courts can order directors to contribute personally to the company’s assets if losses to creditors increase because of continued trading.
Directors may also face disqualification if their conduct is found to be unfit.
Warning signs directors should act on
Overdue tax or payroll liabilities
Persistent supplier arrears
Court judgments or statutory demands
Company debts exceeding assets
Using personal borrowing to fund routine company expenses
Selling assets below market value
Favouring one creditor over others
If these warning signs appear, directors should seek advice from a licensed insolvency practitioner promptly.
Corporate insolvency procedures open to your company
Several formal procedures exist for insolvent companies. Each serves a different purpose depending on whether the business can be rescued.
Creditors’ Voluntary Liquidation (CVL)
A CVL occurs when directors decide the company cannot continue trading and shareholders pass a resolution to wind it up.
A licensed insolvency practitioner is appointed as liquidator to sell assets and distribute funds to creditors.
Compulsory liquidation
Creditors can apply to the court to wind up a company that owes them money. If the court grants the order, the Official Receiver initially becomes the liquidator.
Creditors may pursue this route if debts remain unpaid and other recovery methods have failed.
Administration
Administration aims to rescue the company as a going concern or achieve a better result for creditors than immediate liquidation.
An administrator takes control of the company and may continue trading while attempting restructuring or selling the business.
Company Voluntary Arrangement (CVA)
A CVA allows a company to reach a legally binding repayment agreement with creditors.
The proposal must be approved by at least 75% in value of the creditors who vote, and more than half of the unconnected creditors voting must also support it. Once approved, the arrangement binds all unsecured creditors.
Solvent alternatives
Members’ Voluntary Liquidation and Companies House strike-off are only available when the company can pay all debts in full.
Personal insolvency routes if guarantees apply
If directors have personal guarantees or personal debts connected to business failure, individual insolvency procedures may apply.
Bankruptcy
Individuals can apply for bankruptcy online, currently with a £680 application fee. Creditors may also petition the court if they are owed at least £5,000.
Once bankrupt, a trustee or the Official Receiver takes control of assets for the benefit of creditors. Most people are discharged after about 12 months.
Individual Voluntary Arrangement (IVA)
An IVA allows individuals to agree a structured repayment plan with creditors while avoiding bankruptcy.
Approval requires 75% in value of creditors who vote. Payments usually last several years.
Debt Relief Order (DRO)
A DRO is designed for people with low income and limited assets. Qualifying debts must be £50,000 or less and assets typically below £2,000.
During the 12-month DRO period, debts are frozen and usually written off at the end if the person’s circumstances have not improved.
How creditors can force the issue: winding-up vs bankruptcy petitions
If debts remain unpaid, creditors may apply to the court.
Company winding-up petition
Creditors owed at least £750 can apply to the court to wind up a company.
If the court grants the petition, the company enters compulsory liquidation and the Official Receiver takes control of the company’s assets.
Creditor bankruptcy petition
Creditors owed at least £5,000 may petition for an individual’s bankruptcy.
The court will consider the petition and may issue a bankruptcy order if the debt remains unpaid and undisputed.
Effects of formal proceedings
Once formal insolvency proceedings begin:
The process becomes public through official registers or Gazette notices
Insolvency practitioners investigate company affairs
Assets are realised and distributed to creditors
Cost and consequence cheat-sheet
Typical government fees
Debtor bankruptcy application: £680
Creditor bankruptcy petition (England and Wales): £1,500 deposit plus £343 court fee
Creditor winding-up petition: £2,600 deposit plus £343 court fee
Company strike-off application (DS01): £13 online
Possible consequences
Insolvency proceedings appear on official registers
Directors may face disqualification for up to 15 years
Company assets are controlled by the liquidator
Personal assets may be affected in bankruptcy
Common mistakes directors make and how to avoid them
Common errors that increase risk include:
Applying for strike-off while debts remain
Paying certain creditors ahead of others
Using personal funds to cover company losses without proper advice
Selling assets cheaply before insolvency
Continuing to trade while insolvent
Failing to keep proper accounting records
Seeking early professional advice reduces the risk of personal liability.
Quick myths clarified
“A company can be made bankrupt.” – Bankruptcy applies only to individuals.
“Insolvency means the business must close immediately.” – Insolvency is a financial condition; formal procedures determine the outcome.
“Strike-off clears company debts.” – Strike-off is not a substitute for insolvency procedures when debts remain.
“All insolvent individuals become bankrupt.” – Alternatives such as IVAs or DROs may be available.
UK regional differences
Insolvency law broadly applies across the UK but some terminology and procedures differ.
Scotland
Personal bankruptcy is known as sequestration and is administered by the Accountant in Bankruptcy.
Northern Ireland
Corporate procedures broadly mirror those in England and Wales, but court procedures and fees may differ.
FAQs
Can a creditor make my company bankrupt?
No. Creditors cannot make a company bankrupt. Their remedy is to apply to the court for a winding-up order, which may result in compulsory liquidation.
Does company administration affect my personal credit score?
Administration applies to the company, not its directors. Personal credit is affected only if directors have personal guarantees or enter personal insolvency.
What happens to a Bounce Back Loan in liquidation?
The loan is treated as an unsecured company debt. The government guarantee protects the lender, not the borrower. Directors are normally not personally liable unless the loan was misused or a personal guarantee applies.
Can I start another company after liquidation?
Yes, unless you have been disqualified as a director. However, rules restrict using the same or similar company name for five years without meeting certain conditions.
Can I be a company director while bankrupt?
No. Undischarged bankrupts cannot act as company directors without court permission. The restriction usually ends when bankruptcy discharge occurs.
What’s the difference between a CVA and an IVA?
A CVA applies to companies, allowing them to repay creditors while continuing to trade. An IVA applies to individuals and restructures personal debts.
Are insolvency proceedings public?
Yes. Company insolvencies appear in the Gazette and Companies House records. Personal bankruptcies appear on the Individual Insolvency Register.
Is receivership still used?
Administrative receivership is largely restricted to certain older security arrangements created before September 2003.
What assets can I keep in bankruptcy?
Basic household items and tools needed for work are usually exempt, while valuable assets may be sold for creditors.
Can I dissolve an insolvent company instead of liquidating it?
No. Companies House guidance states that strike-off should not be used as an alternative to formal insolvency when debts remain.
What is sequestration?
Sequestration is the Scottish term for personal bankruptcy.
Does a Debt Relief Order affect being a company director?
A person subject to a Debt Relief Order is subject to restrictions similar to bankruptcy, including limits on acting as a company director without court permission.
How long does a winding-up petition process take?
Timescales vary depending on court schedules, but once a petition is issued, the process may progress to a hearing within several weeks.
What’s the minimum debt for a creditor to bankrupt someone?
In England and Wales, creditors must be owed at least £5,000 to present a bankruptcy petition.
Your next step: get clarity before costs spiral
If your company is struggling to pay debts, early professional advice can prevent legal escalation and personal risk.
Speaking with a licensed insolvency practitioner can help clarify the options available and ensure directors comply with their legal duties before creditor action begins.
