Insolvency and bankruptcy are not the same thing. Insolvency means being unable to pay your debts, and it can apply to a company or to a person. Bankruptcy is one of the formal procedures for an insolvent individual, and it never applies to a company. If your limited company cannot pay its debts, you are dealing with insolvency, not bankruptcy.
The words matter in practice. A search for “bankruptcy” turns up guidance on personal debt solutions, such as debt relief orders, debt management plans and individual voluntary arrangements, and none of those can deal with a company’s debts.
If what you need is the practical side, our guide to what happens when a company goes bankrupt covers what happens to the company and to you, and what to do first.
Quick Answer: Insolvency vs Bankruptcy in the UK
| Company insolvency | Personal bankruptcy | |
|---|---|---|
| Applies to | Companies, LLPs, partnerships | Individuals only |
| Legal framework | Insolvency Act 1986, the company parts | Insolvency Act 1986, the personal parts |
| Main routes | Voluntary liquidation (creditors’ CVL or members’ MVL), administration, company voluntary arrangement (CVA), compulsory liquidation | Bankruptcy, individual voluntary arrangement (IVA), debt relief order (DRO). A debt management plan is informal. Scotland uses sequestration |
| Who controls the process | Licensed insolvency practitioner or Official Receiver (in a CVA the directors keep running the company under a supervisor) | Official Receiver or trustee in bankruptcy. In an IVA, a licensed insolvency practitioner as supervisor |
| Effect on the entity | Liquidation ends with the company dissolved. Administration or a CVA can rescue it | Individual is discharged after 12 months (usually) |
| Director relevance | Directly. You decide whether to start a process, but in liquidation or administration the office-holder takes control | Mainly if you personally guaranteed company debts, owe the company money on a director’s loan account, or face a court order or HMRC notice making you personally liable |
| Public record | Companies House, London Gazette | Individual Insolvency Register |
When Insolvency Applies: Your Company Cannot Pay Its Debts
If your limited company fails either the cash-flow test (cannot pay debts as they fall due) or the balance-sheet test (assets are worth less than liabilities, including contingent and future ones) under section 123 of the Insolvency Act, it is insolvent.
The routes available to an insolvent company are all corporate insolvency processes: CVL, CVA, administration, or compulsory liquidation. A members’ voluntary liquidation is only for a solvent company.
The company is a separate legal entity from you. Its insolvency does not make you insolvent. Its debts are not your debts.
You can still become personally liable if you gave personal guarantees, owe the company money on an overdrawn director’s loan account, or a court or HMRC makes you personally liable (for example for wrongful trading, misfeasance, or unpaid National Insurance through fraud or neglect).
Mixing the two up can lead to expensive decisions. A director who thinks the company’s failure will make them bankrupt may put personal savings into the company to prevent it, when limited liability had already kept those savings away from the company’s debts.
When Bankruptcy Applies: You Personally Cannot Pay Your Debts
Bankruptcy is a personal insolvency process. It applies when an individual (not a company) cannot pay their debts. In England and Wales, you can be made bankrupt if a creditor you owe £5,000 or more petitions the court, or if you apply for bankruptcy yourself.
A director of a limited company may face personal bankruptcy if: personal guarantees you gave for company debts are called in and you cannot pay them, a wrongful trading contribution order is made against you and you cannot pay it, or HMRC issues a personal liability notice for unpaid National Insurance that the company failed to pay because of your fraud or neglect, and you cannot settle it.
In each case a personal debt, not the company’s insolvency, leads to bankruptcy.
A guarantee is the plainest example. The director guarantees a company lease or bank facility, the company enters liquidation, the lender calls in the guarantee, and the director cannot pay it from personal assets.
In England and Wales that can mean bankruptcy (you can apply yourself for any amount), an individual voluntary arrangement, or a Debt Relief Order. A Debt Relief Order needs debts of no more than £50,000, assets of no more than £2,000 (one vehicle worth less than £4,000 is not counted) and spare income of no more than £75 a month.
Why the Distinction Matters for Directors
Company insolvency does not appear on your personal credit file. Your company’s liquidation is recorded at Companies House, not on your credit report. Bankruptcy appears on the Individual Insolvency Register until three months after discharge, or longer under a bankruptcy restrictions order, and stays on your credit file for six years from the date of the order.
Company insolvency does not automatically disqualify you from being a director. Director disqualification is a separate process that depends on your conduct, not on the insolvency itself.
Bankruptcy, however, automatically disqualifies you from acting as a director for the duration of the bankruptcy (typically 12 months), or longer if a bankruptcy restrictions order or undertaking is made, unless you get court permission.
Liquidation ends the company, although administration or a CVA can sometimes rescue it. Bankruptcy affects your personal life. A bankrupt individual may lose their home, their savings and their car (unless it is needed for work and is not worth more than a reasonable replacement).
A director whose company enters insolvency does not lose personal assets unless personal liability has been established.
The company’s problem and your personal problem can overlap, but they need different advice. Any liquidator or administrator must investigate the directors’ conduct and report on it, and that report can lead to personal claims.
What You Should Do If You Are Facing Both
If your company is insolvent and you have personal guarantees that may be called in, you need two types of advice: corporate insolvency advice for the company and personal insolvency or debt advice for yourself. These are not always provided by the same practitioner.
Company Debt is a licensed insolvency practice. We advise on the company’s route and show you where your personal exposure lies. If you need independent personal advice, we will say so. A free, confidential consultation sorts out which problems belong to the company and which belong to you.
FAQs About Insolvency vs Bankruptcy in the UK
Can a company go bankrupt in the UK?
No, not in the legal sense. In the UK, bankruptcy applies only to individuals. Companies go into liquidation, administration, or enter a CVA. The term “bankruptcy” is sometimes used colloquially to mean “company failure,” but it has no legal application to companies under UK law.
Will my company’s insolvency make me personally bankrupt?
Not automatically. Company insolvency and personal bankruptcy are separate. You may face personal bankruptcy if you cannot pay a personal liability that arises from the company’s failure.
The main routes are a called-in personal guarantee, an overdrawn director’s loan account the liquidator recovers, a court order (for example for wrongful trading or misfeasance), or an HMRC personal liability notice. Limited liability protects your personal assets from the company’s debts unless one of these specific routes applies.
Does company insolvency affect my credit score?
Not directly, though personal debts that follow it can. If a guarantee is called in and you default on it, the default is recorded against you. A bankruptcy that follows from company-related debts is recorded too, for six years.
Is ‘going bust’ the same as bankruptcy?
“Going bust” is colloquial, not legal. When people say a company “went bust,” they usually mean it entered liquidation or ceased trading. Usually the company was insolvent and entered liquidation, although some are simply struck off. Bankruptcy in the UK is a specific legal process for individuals, not companies.
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