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.
Payroll is due on Friday, suppliers are chasing, and an HMRC warning letter sits unopened on your desk. The question is blunt: should you close the company and stop the bleed, or fight to keep it alive? This guide walks you step by step through the tests, warning signs and rescue tools so you can choose the option that protects cash, reputation and personal liability.
General guidance only; take regulated advice for your circumstances.
If your company fails either statutory test of insolvency, you must act quickly. Under the Insolvency Act 1986, directors who continue trading when they know or ought to know there is no reasonable prospect of avoiding insolvent liquidation or administration may face a wrongful trading claim. A court can order the director to contribute to the company’s assets if they failed to take every step to minimise losses to creditors.
Cash-flow test
Can the business pay its debts as they fall due? Missed payroll, rent or VAT deadlines are warning signs that the company may be cash-flow insolvent.
Balance-sheet test
Do total liabilities exceed total assets? When liabilities, including contingent ones such as guarantees or lease commitments, outweigh assets, the company may be balance-sheet insolvent.
Directors’ core duties once insolvency is likely
When insolvency becomes likely, directors must consider the interests of creditors. Practical steps usually include:
Monitoring the company’s financial position closely
Keeping accurate and up-to-date accounting records
Avoiding actions that unfairly prejudice creditors
Persistent tax arrears or repeated payment arrangements with HMRC
Relying heavily on supplier credit to meet operating costs
Lack of a credible short-term cash-flow forecast
Negative equity on the balance sheet after adjusting for tax liabilities
Director loan balances that cannot realistically be repaid
Common mistake to avoid
Paying one creditor ahead of others, especially a connected party, may later be challenged as a preference if the company enters liquidation.
If either insolvency test is failed, seeking professional advice quickly can help protect both the company and the directors.
Why Acting Early Protects You and the Business
Acting early keeps more options available. Delaying decisions when a company is struggling financially can reduce the chances of rescue and increase the risk of investigation if the company later enters liquidation.
Creditors may escalate recovery action over time. This can include court judgments or, in serious cases, a winding-up petition asking the court to place the company into compulsory liquidation.
Once formal insolvency begins, an insolvency practitioner or the Official Receiver investigates the company’s affairs and the conduct of its directors. Taking reasonable steps early, such as monitoring finances and seeking advice, can help demonstrate that directors acted responsibly.
Seeking advice early can also open the door to restructuring tools such as:
The key point is simple: acting while options still exist gives the business the best chance of survival.
Five Signs Your Company Can Still Be Saved
Some struggling companies remain fundamentally viable. Warning signs of possible recovery include:
Profitable core trade – the underlying business model still generates profit before debt pressure.
Reliable order pipeline – confirmed work or recurring contracts provide near-term revenue.
Creditor cooperation – suppliers, landlords or HMRC are willing to discuss payment plans.
Potential funding – investors, lenders or directors are willing to inject additional capital.
Clear management action – directors are prepared to cut costs and implement a credible turnaround plan.
Mini-scenario
A retailer experiencing rent pressure negotiates revised lease terms and restructures its operations through a Company Voluntary Arrangement. By reducing costs and closing underperforming locations, the business stabilises and returns to profitability.
Five Signs Closure Is the Safer Option
Sometimes rescue is not realistic. Warning signs include:
No funds available for imminent payroll or essential operating costs
Key suppliers withdrawing credit terms
A major lender demanding repayment or enforcing guarantees
HMRC rejecting payment proposals while arrears continue to rise
Loss of key customers or revenue streams
If these pressures combine and no realistic recovery plan exists, starting a formal insolvency procedure may limit further losses.
Informal Ways to Stabilise Cash Flow First
Some companies resolve short-term financial stress through informal arrangements before entering formal insolvency procedures.
HMRC Time to Pay
A Time to Pay arrangement allows businesses to spread tax debts over an agreed period.
✅ Pros
Spreads payments across instalments
Can reduce enforcement pressure if maintained
❌ Cons
Interest may still apply to late tax
HMRC expects realistic forecasts and continued compliance
Invoice finance
Invoice finance allows businesses to receive early payment on outstanding invoices.
✅ Pros
Unlocks working capital tied up in debtor balances
Funding increases with sales
❌ Cons
Service costs reduce margins
Providers may impose conditions
Cost reduction
Short-term cost reductions can help stabilise finances.
✅ Pros
Immediate cash preservation
Helps reset cost base
❌ Cons
Over-cutting may damage long-term growth
Creditor payment plans
Some suppliers or landlords may accept temporary payment schedules.
✅ Pros
Preserves supplier relationships
May avoid formal insolvency
❌ Cons
Informal agreements may collapse if payments are missed
Formal Rescue Procedures in the UK
Where the business still has long-term potential, formal restructuring procedures may help.
Company Voluntary Arrangement (CVA)
A CVA is a formal agreement between a company and its creditors to repay debts over time. At least 75% by value of creditors who vote must approve the proposal for it to proceed. Once approved, the arrangement becomes binding on all unsecured creditors.
The company’s directors usually remain in control of day-to-day trading while an insolvency practitioner supervises the arrangement.
Administration
Administration places the company under the control of an administrator. The objective is to rescue the company, achieve a better outcome for creditors than liquidation, or realise assets in an orderly way.
Administration may involve restructuring the business or selling its assets.
External investment or refinancing
New investment or refinancing may help clear debts and stabilise operations. However, investors typically require detailed financial information and may request equity stakes or governance rights.
Company Closure Routes Explained
Several procedures exist to close a UK limited company.
Creditors’ Voluntary Liquidation (CVL)
A CVL occurs when directors and shareholders decide to wind up an insolvent company voluntarily. An insolvency practitioner is appointed to realise assets and distribute funds to creditors.
Compulsory liquidation
Compulsory liquidation happens when a creditor petitions the court to wind up the company. The court appoints the Official Receiver and possibly a liquidator.
Voluntary strike-off
Companies House allows companies to apply for strike-off if they meet certain conditions, such as not trading or selling stock in the previous three months and not being subject to insolvency proceedings.
Creditors can object, and companies with unresolved debts may later be restored to the register.
Members’ Voluntary Liquidation (MVL)
An MVL is used when a company is solvent and able to pay its debts within 12 months. It allows assets to be distributed to shareholders in an orderly way.
Personal Consequences for Directors
Directors may face personal financial consequences depending on the company’s circumstances.
Personal guarantees
If directors personally guaranteed borrowing, lenders may pursue them for repayment if the company defaults.
Director loan accounts
An overdrawn director loan account may be treated as an asset of the company in liquidation and the liquidator may seek repayment.
Director redundancy
Directors who are employees of the company and meet the relevant eligibility criteria may be able to claim statutory redundancy and related payments through the Redundancy Payments Service.
Conduct investigations
In most liquidations, the liquidator must submit a report on director conduct to the Insolvency Service.
Serious misconduct can lead to director disqualification for up to 15 years.
Decision Matrix: Choosing Between Rescue and Closure
A structured approach can help directors decide the next step.
Step 1 – Assess insolvency
Determine whether the company can pay debts when due and whether liabilities exceed assets.
Step 2 – Assess recovery prospects
Identify whether the underlying business remains viable.
Step 3 – Evaluate short-term support
Consider whether payment plans, refinancing or restructuring could stabilise the company.
Step 4 – Consider formal options
If recovery is unlikely, liquidation procedures may provide an orderly closure.
Common Mistakes Directors Make Under Pressure
Directors sometimes make decisions under stress that increase risks.
Injecting personal funds without a plan
Directors should understand the company’s financial position before investing personal savings.
Paying connected creditors first
Preferential payments can later be challenged in liquidation.
Ignoring HMRC correspondence
Engaging early with HMRC often leads to better outcomes than delaying contact.
Continuing to trade without reviewing finances
Regular financial reviews help directors assess whether continued trading is responsible.
Using tax funds to cover other costs
Failing to pay taxes when due can increase enforcement action and financial pressure.
FAQs
Can I take a salary while my company is insolvent?
Directors must consider creditors’ interests once insolvency is likely. Payments that worsen creditor losses may later be challenged. Professional advice is recommended before continuing normal remuneration.
What happens to Bounce Back Loans if the company is liquidated?
Bounce Back Loans remain company liabilities. Lenders may claim under the government guarantee if the borrower cannot repay, but borrowers remain responsible for the debt. Liquidation may determine how the debt is treated alongside other company liabilities.
Am I personally liable for unpaid PAYE or VAT?
Company taxes normally remain company debts. However, in certain circumstances HMRC may pursue directors personally, for example where specific statutory notices apply or serious wrongdoing is involved.
How long does a CVL take?
The decision to place a company into liquidation can be made quickly once shareholders approve the process. The full liquidation procedure may take significantly longer depending on asset realisation, creditor claims and investigations.
Can I start another company after liquidation?
Yes, unless you are disqualified as a director or personally bankrupt. However, rules apply to the reuse of company names following liquidation.
What happens to employees in administration?
Administrators decide whether to continue employing staff while the business trades or prepares for sale. Employees may claim statutory payments if their employment ends.
Will creditors know about a CVA?
Yes. Creditors receive the proposal and vote on the arrangement, and certain records appear at Companies House.
Do shareholders need to approve liquidation?
In a Creditors’ Voluntary Liquidation, shareholders normally pass a resolution to wind up the company before the liquidator is appointed.
Can HMRC refuse a Time to Pay arrangement?
Yes. HMRC considers the company’s compliance history, financial forecasts and ability to meet future obligations when deciding whether to accept a proposal.
Can a company with debts apply for strike-off?
Yes, but creditors may object to the application or apply to restore the company to the register if debts remain unpaid.
Can directors claim redundancy?
Directors who are employees and meet the eligibility criteria may qualify for statutory redundancy and related payments.
What records should directors keep during financial difficulty?
Maintaining full accounting records, financial statements, contracts, payroll data and correspondence helps insolvency practitioners assess the company’s affairs if formal proceedings begin.
Your Next Move
If your company is struggling to meet payroll or tax obligations, reviewing your options early can protect both the business and the directors.
Speaking to a licensed insolvency practitioner or professional adviser can help you understand whether restructuring is realistic or whether an orderly closure is the safer path.
Taking advice early helps directors make informed decisions and demonstrate that they acted responsibly during financial difficulty.
