Should I Seek Insolvency Advice Before Missing Payments?

Payroll is due next Friday, the VAT deadline follows, and the cash simply will not stretch to both. That gap is more than a routine cash-flow squeeze. If a company cannot pay debts when they fall due or its liabilities outweigh its assets, it may already be insolvent under the Insolvency Act 1986.

At that point, directors’ duties shift towards protecting creditors’ interests, and seeking professional advice early can help you understand your options and avoid worsening creditors’ losses.

Insolvency can arise before a payment is missed: what the law says

Under Section 123 of the Insolvency Act 1986, a company is regarded as unable to pay its debts in certain circumstances, including where it cannot pay debts as they fall due or where its liabilities exceed its assets when contingent and prospective liabilities are taken into account.

If insolvency is likely or has already occurred, directors must act carefully and prioritise the interests of creditors. Seeking regulated advice at this stage can help clarify your position and identify possible rescue options.

Cash-flow test: can the company pay debts when they fall due?

The cash-flow test considers whether the business can meet its debts at the time they become payable. These may include wages, supplier invoices, rent, tax liabilities, or loan repayments.

If the company cannot meet these obligations as they fall due, it may be regarded as insolvent under the cash-flow test.

Example
ABC Ltd has £50,000 in the bank but must pay £80,000 in wages and VAT within the next week. If it cannot meet those liabilities when they become due, it may be unable to pay its debts as they fall due.

Balance-sheet test: are liabilities greater than assets?

The balance-sheet test looks at whether the company’s total liabilities exceed its assets. This includes not only current debts but also contingent or prospective liabilities.

Example
XYZ Engineering owns machinery valued at £200,000 but owes £260,000 to lenders and suppliers. Even if current bills are being paid, the excess of liabilities over assets may indicate balance-sheet insolvency.

Why acting early matters

If a company is insolvent or likely to become insolvent, directors must consider the interests of creditors and take steps to minimise further losses. Seeking advice early can help directors understand their duties and explore available restructuring or insolvency procedures before enforcement action escalates.

A typical escalation of creditor pressure may look like this:

• Reminder emails or calls requesting payment
• Letters before action or additional charges
• Statutory demand (for debts of £750 or more, giving 21 days to respond)
• Winding-up petition filed at court
• Court-ordered liquidation if the petition succeeds

Once a winding-up petition has been filed, banks may freeze the company’s accounts, making it difficult to continue trading. Acting earlier can help directors understand whether rescue procedures or repayment arrangements may be available.

Early warning signs your company may need advice

Spotting problems early gives directors time to assess the company’s position and consider options. If several of the following issues are present, it may be sensible to seek professional guidance.

• The company regularly reaches its overdraft limit or struggles to access additional credit
• Supplier payment terms are being extended to manage cash flow
• Tax liabilities are accumulating or becoming difficult to pay on time
• Directors are injecting personal funds to cover operating costs
• Short-term borrowing is used repeatedly to cover existing debts
• Creditor letters, county court judgments, or statutory demands have been received
• Key customers are paying late, creating ongoing cash-flow gaps
• Suppliers request upfront or pro-forma payment
• Inventory builds up while sales slow
• Staff or suppliers raise concerns about the company’s financial stability

If these warning signs appear, understanding your legal duties and options becomes important.

How director duties change when insolvency is likely

When a company becomes insolvent, or insolvency is likely, directors must prioritise the interests of creditors rather than shareholders. This principle is reflected in UK insolvency law and guidance from the Insolvency Service.

Continuing to trade while insolvent is not automatically unlawful. However, under Section 214 of the Insolvency Act 1986, a court may hold directors personally liable for wrongful trading if:

• The company later enters insolvent liquidation or administration, and
• The director knew or ought to have concluded there was no reasonable prospect of avoiding that outcome, and
• They failed to take every step to minimise potential losses to creditors.

In practice, responsible conduct may include:

• Avoiding unnecessary new liabilities
• Protecting company assets
• Treating creditors fairly
• Keeping accurate financial records and forecasts
• Seeking professional advice where appropriate

Documenting decisions and acting transparently can help demonstrate that directors tried to minimise creditor losses.

Risk to avoid: preferential payments

A company close to insolvency must be careful not to favour certain creditors unfairly. A liquidator may challenge “preference” payments made shortly before insolvency if they put one creditor in a better position than others.

This may include paying connected parties, directors’ loans, or selected suppliers ahead of others. Professional advice can help directors assess whether payments could create risk later.

Potential consequences if financial problems escalate

If insolvency leads to a formal procedure such as liquidation or administration, several outcomes may follow.

• Wrongful trading claims if directors failed to minimise creditor losses
• Director disqualification of up to 15 years if misconduct is proven
• Investigation of directors’ conduct by the Insolvency Service
• Frozen bank accounts once a winding-up petition is filed
• Public notice of insolvency proceedings through court processes and official records

Understanding these risks early allows directors to make informed decisions and seek appropriate advice.

Options that may be considered before liquidation

If a company is experiencing financial difficulty but still has a viable core business, several formal and informal restructuring options may be explored.

Option	How it works	Control kept	Court involvement	Typical timeframe
Company Voluntary Arrangement (CVA)	Repayment proposal to creditors supervised by an insolvency practitioner and approved by at least 75% of voting creditors	Directors usually remain in control	Court involvement limited	Often several weeks to propose
Administration	Administrator takes control to rescue the company, achieve a better result for creditors, or realise assets	Control passes to administrator	May involve court or out-of-court appointment	Usually begins quickly once appointed
Moratorium (Corporate Insolvency and Governance Act 2020)	Temporary protection from most creditor enforcement while a rescue plan is explored	Directors remain in control under a monitor	Filing requirements apply	Initially up to 20 business days
Restructuring Plan	Court-approved restructuring arrangement binding creditor classes	Directors remain in office	Requires court approval	Often several months
HMRC Time to Pay	Instalment arrangement to repay tax debts	Directors retain control	No court involvement	Negotiated directly with HMRC
Informal creditor agreements	Negotiated extensions or settlements with creditors	Directors retain control	None	Depends on negotiations

The availability of these options depends on the company’s circumstances and the willingness of creditors to cooperate.

How to verify a licensed insolvency practitioner

If you decide to seek advice, ensure the adviser is properly licensed.

Steps to check:

• Search the GOV.UK “Find an insolvency practitioner” service
• Confirm the practitioner’s Recognised Professional Body (for example ICAEW, ICAS, or the IPA)
• Check the regulator’s own membership register
• Be cautious of firms describing themselves only as “business rescue specialists” without a licensed practitioner

Only licensed insolvency practitioners can formally act as liquidators, administrators, or supervisors of formal insolvency procedures.

Common fee structures

Model	How it’s charged	Where commonly used
Time-cost	Hourly rates for work carried out	Administrations or complex cases
Fixed fee	Agreed fee for specific work	CVA proposals or advisory work
Percentage	Portion of realised asset value	Liquidations

Fees must usually be approved by creditors or the court in formal insolvency procedures.

What to expect when you first seek advice

Initial discussions with an insolvency practitioner typically focus on understanding the company’s financial position and possible options.

Topics usually covered include:

• Basic company details and trading activity
• Current cash position and upcoming liabilities
• Major creditors and security arrangements
• Recent trading performance and future prospects

The practitioner may then request documents such as:

• Latest statutory or management accounts
• Cash-flow forecasts
• A list of creditors and outstanding debts

After reviewing the information, they can outline possible restructuring or insolvency procedures that may be appropriate.

Common mistakes directors make under cash pressure

Financial stress can lead to decisions that later create legal risk.

Examples include:

• Paying one creditor ahead of others without considering potential preference rules
• Taking on additional borrowing without assessing whether the company can realistically repay it
• Ignoring communication from creditors or HMRC
• Relying on unregulated advisers rather than licensed insolvency professionals

Taking advice early can help directors assess these risks before they escalate.

FAQs

Your next move

If your company is struggling to meet upcoming payments, reviewing the financial position early can help you understand your legal duties and available options.

Possible first steps include:

• Checking the GOV.UK “Find an insolvency practitioner” service
• Reviewing HMRC guidance on Time to Pay arrangements
• Contacting reputable advice organisations such as Citizens Advice or MoneyHelper for guidance

Taking advice early allows directors to understand the company’s position, consider restructuring options, and act in the best interests of creditors.