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 sudden tax demand from HMRC, a supplier’s seven-day ultimatum or a bank freezing the overdraft can leave you staring at the calendar rather than the balance sheet. When cash is tight, your next move carries legal as well as personal consequences: choose the wrong route and you risk wrongful-trading claims or disqualification.
The flowchart below cuts through the noise, showing step by step whether to strike off, rescue or liquidate and when to involve a licensed Insolvency Practitioner.
This is general guidance only; always obtain regulated professional advice before taking action.
UK insolvency law recognises two main tests used by courts and insolvency practitioners to assess whether a company is insolvent. If either applies, directors must take particular care to minimise potential losses to creditors and seek professional advice promptly.
Cash-flow test – the “can we pay the bills?” check
Ask whether the company can meet debts as they fall due in the near future.
This test is forward-looking, so liabilities falling due soon are relevant even if they are not yet overdue.
Balance-sheet test – the “what are we worth?” check
Add up all company assets at realistic realisable values and compare them with all liabilities, including contingent and prospective liabilities such as:
guarantees
legal claims
tax liabilities under investigation
If total liabilities exceed assets, the company may be insolvent on a balance-sheet basis.
Statutory demand trigger
Under section 123 of the Insolvency Act 1986, a company is deemed unable to pay its debts if:
a creditor owed £750 or more serves a statutory demand
When directors know, or ought reasonably to conclude, that the company may not avoid insolvent liquidation or administration, they must take steps to minimise potential losses to creditors.
Continuing to trade irresponsibly at that point can expose directors to wrongful trading claims under section 214 of the Insolvency Act 1986.
Instant checklist
Are supplier, HMRC or rent bills already overdue?
Will the company miss payroll or tax payments soon?
Do total liabilities outweigh assets?
Has a creditor served a statutory demand for £750 or more?
If any of these apply, seek professional advice quickly.
Why Speed Matters: Director Duties, Wrongful Trading & Personal Risk
Delay can turn a company crisis into a personal one.
Under section 214 of the Insolvency Act 1986, directors can be ordered by a court to contribute personally to company assets if they continued trading when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration.
Even well-intentioned decisions can create problems if they increase the loss to creditors.
Other transactions may also be challenged later by a liquidator, including:
A preference occurs where a company puts one creditor in a better position than others shortly before insolvency. The relevant time period is generally:
6 months before insolvency, or
2 years for connected persons
Serious misconduct may be reported to the Insolvency Service and can lead to director disqualification for up to 15 years under the Company Directors Disqualification Act 1986.
Scenario: trading on for one extra payroll
Directors prioritise paying wages while other creditors remain unpaid
The company then enters liquidation with fewer assets
A liquidator may investigate whether creditors suffered additional losses because trading continued
Decision Tree at a Glance: Download or Screenshot This Flowchart
Act quickly: the branch you choose here determines whether creditors remain calm or initiate legal action.
Cheat sheet – main forks at a glance:
Solvent and debt-free → Strike-off (DS01)
Solvent with significant surplus → Members’ Voluntary Liquidation
Insolvent but viable business → Administration
Cash-flow pressure but viable trading → Company Voluntary Arrangement or Moratorium
Insolvent with no rescue → Creditors’ Voluntary Liquidation
If the company can pay all debts in full, directors normally choose between strike-off or a Members’ Voluntary Liquidation.
Choose carefully, because using strike-off when debts exist may lead to the company being restored to the register.
Strike-Off (DS01)
Eligibility
A company may apply to be struck off if it:
has no outstanding liabilities
has not traded or sold assets outside normal closure activities in the last three months
is not subject to insolvency proceedings
has not changed its name in the last three months
How it works
Directors submit Form DS01 to Companies House.
A notice is published in The Gazette.
If no objections are raised, the company is dissolved after about two months.
Pros
Simple process
Minimal Companies House fee
No insolvency practitioner required
Cons
Creditors can object to the strike-off
A company can be restored to the register for up to six years
Tax note
Where distributions are made before dissolution, tax treatment depends on the circumstances. In some cases distributions may qualify for capital treatment under HMRC rules, while in others they may be treated as income.
A CVA allows the company to continue trading while repaying debts under a structured plan.
Key features:
proposal prepared by an insolvency practitioner
approved if 75% by value of voting creditors agree
binds all unsecured creditors once approved
Moratorium
Introduced by the Corporate Insolvency and Governance Act 2020, a moratorium provides a short period of protection while rescue options are explored.
Key features:
initial 20 business-day period, extendable
overseen by an insolvency practitioner acting as monitor
creditors generally cannot enforce debts during the period
If a winding-up petition already exists, court permission is required.
Restructuring Plan (Part 26A Companies Act 2006)
A restructuring plan allows companies to compromise debts through a court-approved scheme.
Key features:
creditors vote in classes
75% by value of those voting in each class must approve
courts may allow cross-class cram-down in certain circumstances
This tool is most commonly used by larger companies.
Branch 3 – Liquidation Routes When Rescue Isn’t Viable
If recovery is unrealistic, liquidation closes the company in an orderly way.
Creditors’ Voluntary Liquidation (CVL)
A CVL begins when shareholders pass a special resolution to wind up the company.
Key steps
resolution filed with Companies House within 15 days
notice advertised in The Gazette within 14 days
a licensed insolvency practitioner acts as liquidator
The liquidator:
sells company assets
distributes funds to creditors in statutory order
reports on director conduct to the Insolvency Service
Compulsory Liquidation
Compulsory liquidation occurs when the court makes a winding-up order.
Typical process
Creditor serves statutory demand (optional but common)
Creditor presents winding-up petition
Petition advertised in The Gazette
Court hearing decides whether to wind up the company
If the order is made, the Official Receiver becomes liquidator initially.
Directors should review two common personal exposures:
Risk Alert – Personal Guarantees and Director Loans
Personal guarantees
If the company enters liquidation, lenders may enforce any personal guarantees given by directors.
Overdrawn director loan accounts
An overdrawn director loan account becomes a recoverable asset of the company and may be pursued by the liquidator.
What Happens After You Choose – Timelines, Costs and Creditor Impact
Different procedures affect stakeholders in different ways.
Employees may:
transfer to a buyer under TUPE if a business sale occurs
claim redundancy and arrears from the National Insurance Fund if dismissed
Asset distribution generally follows the statutory order of priority set out in insolvency legislation, including:
fixed-charge secured creditors
insolvency expenses
preferential employee claims
HMRC secondary preferential claims (for certain taxes such as VAT and PAYE)
floating-charge creditors
unsecured creditors
shareholders
Common Pitfalls That Trip Up Directors
Trading while insolvent
Run regular cash-flow forecasts and seek professional advice early.
Preferential payments
Avoid deliberately favouring one creditor over others before insolvency.
Filing strike-off with debts outstanding
Companies House may suspend or reject the application.
Ignoring statutory demands
Creditors may escalate directly to winding-up petitions.
Delaying professional advice
Early guidance from an insolvency practitioner can expand available options.
Clearing Up Frequent Misunderstandings
Administration is not a guaranteed rescue
The goal may be rescue, sale or a better outcome for creditors than liquidation.
HMRC has enhanced priority
Since December 2020, HMRC ranks as a secondary preferential creditor for certain taxes collected by businesses on its behalf.
Strike-off requires debts to be settled
Creditors, including HMRC, can object if liabilities remain outstanding.
Preferences can be challenged
Liquidators can investigate transactions that unfairly favour particular creditors shortly before insolvency.
FAQs
1) Can I apply for strike-off if my company still owes HMRC money?
No. A company applying for strike-off must settle its tax liabilities before dissolution. HMRC can object to a strike-off application if tax debts remain outstanding.
2) How quickly can a CVL be started?
A CVL begins once shareholders pass the resolution to wind up the company and appoint a liquidator. The formal filings must then be made with Companies House and advertised in The Gazette.
3) Do I lose my directorship during administration?
Directors remain in office but control shifts to the administrator, who manages the company’s affairs during the administration.
4) Will employees automatically transfer in a pre-pack sale?
Not necessarily. If a business is sold as a going concern, employees may transfer under TUPE, but where assets are sold without the workforce, employees may be made redundant.
5) Is a moratorium available if a winding-up petition has already been filed?
It may still be possible, but directors must apply to the court and demonstrate that a rescue remains viable.
6) Does HMRC vote in a CVA?
Yes. HMRC may vote as a creditor on the proposal along with other creditors.
7) What happens to my director’s loan account in liquidation?
An overdrawn director loan account is treated as a company asset and may be pursued by the liquidator.
8) Who pays liquidation costs if the company has no assets?
Liquidation costs are normally paid from company assets. Where assets are limited, insolvency practitioners may require funding or an indemnity before undertaking the work.
9) Can I start another company with the same name?
Section 216 of the Insolvency Act 1986 restricts reuse of the same or similar name for five years, unless specific statutory exceptions apply.
10) Are Bounce Back Loans preferential debts?
No. Bounce Back Loans rank as unsecured debts, even though they are backed by a government guarantee.
11) Can a Members’ Voluntary Liquidation become insolvent?
Yes. If it becomes clear during the liquidation that the company cannot pay its debts in full, the process converts into a creditors’ voluntary liquidation.
12) Can a restructuring plan affect shareholders?
Yes. Court-approved restructuring plans can alter debt and equity structures, including reducing or diluting existing shareholder interests.
Your Next Safe Step
Arrange a consultation with a licensed insolvency practitioner as soon as financial distress becomes apparent.
An early conversation can help you:
confirm whether the company may be insolvent
understand the safest legal route forward
reduce the risk of wrongful trading or director liability
Early advice often preserves more options and helps directors demonstrate that they acted responsibly when difficulties arose.
