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.
Cash has dried up, reminder letters are piling on your desk, and the thought crosses your mind: what if the company simply stops paying? Pause before testing that idea. Once payments stop, creditors can pursue court action, serve a statutory demand and, if the debt remains unpaid, petition to wind the company up.
Delay shrinks your choices, so this guide walks through the legal fallout, the powers creditors hold, and the rescue or closure routes open to directors.
Stop paying company debts and consequences can begin quickly. Creditors may escalate from reminders to court action and, if the situation is not resolved, to formal insolvency proceedings.
Here is the typical sequence once debts remain unpaid:
A creditor may issue reminders or a formal “letter before claim”.
If the debt remains unpaid, the creditor can issue a County Court claim.
If a CCJ remains unpaid, creditors may seek enforcement such as bailiffs (warrant of control), charging orders, or third-party debt orders.
For debts exceeding £750, a creditor may serve a statutory demand. If unpaid for 21 days, the company may be legally deemed unable to pay its debts.
The creditor may then present a winding-up petition asking the court to liquidate the company.
The sooner you act, the more options remain available.
First Red Flags – Why One Missed Payment Matters
One overdue invoice rarely sinks a company, yet it can trigger a chain of events: creditors escalate collection efforts, suppliers tighten credit terms, and legal action becomes possible if payment remains outstanding.
UK court procedures allow creditors to pursue unpaid debts through the civil courts. If a claim is issued and the company does not respond within the required period, the court may issue a judgment against the company.
Common early warning signs include:
A letter before claim warning that court proceedings may follow
Suppliers reducing credit limits or demanding payment on delivery
Multiple creditors demanding payment at the same time
When these problems persist, they can signal that the company may be unable to pay debts as they fall due.
When Does Non-Payment Mean Your Company Is Insolvent?
Failing to pay a bill on time does not automatically mean a company is insolvent. However, the law sets out two tests used to determine insolvency.
The two insolvency tests
Cash-flow test – Can the company pay its debts when they fall due?
Balance-sheet test – Do the company’s liabilities exceed the value of its assets?
If either test is failed, the company may be legally insolvent under the Insolvency Act 1986.
Statutory demand presumption
Under section 123(1)(a) of the Insolvency Act 1986, a company is deemed unable to pay its debts if:
a creditor owed more than £750 serves a statutory demand
the debt remains unpaid or unsecured for 21 days
This presumption allows the creditor to present a winding-up petition.
Quick comparison
Situation
Cash-flow test
Balance-sheet test
Insolvent?
VAT paid late but cleared shortly afterwards
Pass
Pass
Likely not insolvent
Multiple creditors unpaid for months
Fail
Possibly pass
Cash-flow insolvent
Liabilities exceed asset value
Pass
Fail
Balance-sheet insolvent
Once insolvency becomes likely, directors must consider the interests of creditors when making decisions.
Creditor Escalation Timeline – Letters to Winding-Up Petition
Failing to pay a creditor can trigger a series of legal steps that may ultimately end with the court winding up the company.
1. Reminder letters
Most creditors begin with reminder letters or requests for payment.
2. County Court claim
If payment is still not made, the creditor may issue a County Court claim. The company normally has 14 days to respond.
3. County Court Judgment (CCJ)
If the claim is ignored or admitted without payment, the court may issue a judgment ordering the company to pay the debt.
4. Enforcement
If the judgment remains unpaid, the creditor may seek enforcement through the courts, including:
Bailiffs (warrant of control)
Charging orders over property
Third-party debt orders against bank accounts
5. Statutory demand
If the debt exceeds £750, a creditor may serve a statutory demand.
6. Winding-up petition
If the statutory demand remains unpaid for 21 days, the creditor may petition the court to wind the company up.
7. Compulsory liquidation
If the court grants the petition, the company enters compulsory liquidation and the Official Receiver initially takes control.
HMRC’s Approach to Unpaid Tax Debts
HMRC is one of the most common petitioning creditors when tax debts remain unpaid.
If your business cannot pay tax liabilities such as VAT or PAYE, HMRC may allow a Time to Pay arrangement. These arrangements allow the company to repay the debt in instalments.
However, if HMRC believes the company cannot pay its debts, it may take enforcement action or present a winding-up petition.
Since 1 December 2020, HMRC has been a secondary preferential creditor in insolvency for certain taxes, including:
VAT
PAYE income tax
employee National Insurance contributions
Construction Industry Scheme deductions
This means those debts are paid ahead of ordinary unsecured creditors during liquidation.
How Your Director Duties Shift Once Insolvent
When a company becomes insolvent or is likely to become insolvent, directors must consider the interests of creditors rather than shareholders when making decisions.
This means directors should:
avoid actions that worsen creditor losses
keep proper financial records
seek professional advice where necessary
ensure decisions are properly documented
Trading may still continue in some circumstances, but directors must act carefully and responsibly.
Insolvent-Trading Checklist
✅ Do
Maintain accurate accounting records
Monitor cash flow closely
Seek advice from a licensed insolvency practitioner
Communicate with creditors where possible
❌ Don’t
Hide or dispose of company assets improperly
make payments designed to favour particular creditors unfairly
falsify or destroy records
ignore formal legal notices
Personal Exposure – Liability, Misconduct and Disqualification
Directors are not normally personally liable for company debts. However, personal consequences can arise if misconduct occurs.
Examples include:
Wrongful trading – continuing to trade when there is no reasonable prospect of avoiding insolvent liquidation
Fraudulent trading – carrying on business with intent to defraud creditors
Misfeasance – breach of directors’ duties or misuse of company funds
Preference payments – favouring certain creditors before insolvency
Courts can order directors to repay money or disqualify them from acting as directors for a period of time under the Company Directors Disqualification Act 1986.
Rescue or Close? Formal Options Compared
If a company cannot pay its debts, several formal procedures exist.
Option
Summary
Moratorium
Temporary protection from creditor action while rescue is explored
Company Voluntary Arrangement (CVA)
Agreement with creditors to repay debts over time
Administration
Insolvency practitioner takes control to rescue the company or achieve a better outcome for creditors
Creditors’ Voluntary Liquidation (CVL)
Directors close the company voluntarily when it cannot continue
Compulsory liquidation
Court-ordered liquidation following a creditor petition
Each option has different consequences for control, trading and creditor protection.
Employees – Redundancy, Wages and Claims
When a company becomes insolvent, employees may be able to claim certain unpaid amounts from the government.
Employees may claim through the Redundancy Payments Service (RPS) for:
statutory redundancy pay
up to eight weeks of unpaid wages
holiday pay
statutory notice pay
For redundancies from 6 April 2025, the weekly pay cap used in redundancy calculations is £719, giving a maximum statutory redundancy payment of £21,570.
Amounts above these limits become unsecured claims in the insolvency.
Where Do the Assets Go and Who Gets Paid First?
When a company enters liquidation, its assets are sold and distributed according to statutory rules.
In broad terms, payments are made in the following order:
Fixed-charge creditors
Costs of the insolvency procedure
Preferential creditors (including certain employee claims)
The prescribed part reserved for unsecured creditors from floating-charge assets
Floating-charge creditors
Unsecured creditors
Shareholders
In many liquidations, unsecured creditors receive only a small proportion of what they are owed.
Key Deadlines, Thresholds and Costs
Several legal thresholds determine when creditor action becomes possible.
Trigger
Official figure
Statutory demand threshold
Debt over £750
Time to respond to statutory demand
21 days
Court fee for creditor winding-up petition
£343
Petition deposit (paid to the Insolvency Service)
£2,600
Moratorium initial period
20 business days
Redundancy weekly pay cap (2025)
£719
Missing these deadlines can quickly escalate matters.
England, Scotland and Northern Ireland – Are the Rules Different?
The Insolvency Act 1986 applies across the UK, but procedures differ between jurisdictions.
England and Wales – winding-up petitions are heard in the High Court or county courts
Scotland – insolvency procedures operate under Scottish courts and rules.
Northern Ireland – petitions are handled by the High Court in Belfast under separate insolvency rules.
Local procedural differences mean advice should be sought within the correct jurisdiction.
Director Do’s & Don’ts Checklist
✅ Do
Monitor cash flow regularly
Keep financial records up to date
communicate with creditors early
seek professional advice when financial distress arises
❌ Don’t
ignore court documents or statutory demands
dispose of assets improperly
conceal financial information
delay action once insolvency becomes likely
FAQs
1) Can I strike off my company if it still owes money?
Companies House allows companies to apply for voluntary strike-off using form DS01. However, strike-off is not intended as a way to avoid paying creditors. Creditors, HMRC or other interested parties can object and stop the process. If a company with debts is struck off, it can also be restored to the register so creditors can pursue recovery.
2) Will unpaid company debts affect my personal credit rating?
Normally no. A limited company is legally separate from its directors. Personal credit is affected only if you have given a personal guarantee or become personally liable through legal proceedings.
3) What happens if I pay some creditors and not others?
If a company later enters insolvency, certain payments made before liquidation can be challenged. In particular, payments that unfairly favour specific creditors may be treated as preferences and can be reversed by a liquidator.
4) Can a creditor seize my personal assets?
Generally no. Creditors can pursue the company’s assets but not the director’s personal property unless a personal guarantee exists or the court imposes personal liability.
5) How long does a winding-up petition take?
Once a petition is presented, the court sets a hearing date. The petition must normally be advertised in The Gazette at least seven working days before the hearing. If the court grants the petition, the company enters compulsory liquidation immediately.
6) Do Bounce Back Loans become personally repayable?
Bounce Back Loans were government-guaranteed and did not require personal guarantees. Normally the debt remains with the company. However, directors may face personal consequences if the loan was obtained fraudulently or misused.
7) What if my company has no assets?
A company with no assets can still be wound up if a creditor petitions the court. The Official Receiver may investigate the conduct of directors even if there are no recoverable assets.
8) Does HMRC’s preferential status apply to old tax debts?
HMRC became a secondary preferential creditor for certain taxes in insolvencies starting on or after 1 December 2020. The age of the tax debt does not matter; the relevant factor is when the insolvency procedure begins.
9) Are directors automatically disqualified after liquidation?
No. The Insolvency Service reviews the conduct of directors after insolvency. Disqualification occurs only if misconduct is proven.
10) Can I start a new company after liquidation?
Yes, unless you have been disqualified as a director. However, strict rules apply if you intend to reuse the same or a similar company name.
11) How much does a Company Voluntary Arrangement cost?
CVA costs vary depending on company size and complexity. Fees are charged by the insolvency practitioner acting as nominee and supervisor and are typically paid from company contributions under the arrangement.
12) Are there government grants to rescue an insolvent company?
There are no specific grants designed to rescue insolvent companies. Businesses usually rely on restructuring, new investment, or formal insolvency procedures to resolve financial distress.
13) What is the difference between a CVL and compulsory liquidation?
A Creditors’ Voluntary Liquidation (CVL) is started by shareholders after directors decide the company cannot continue. A compulsory liquidation is ordered by the court following a creditor’s petition.
14) When should I speak to an insolvency practitioner?
Directors should consider seeking advice as soon as they believe the company may not be able to pay its debts. Early advice can clarify available options and help directors meet their legal duties.
Your Next Step
If your company is struggling to pay its debts, speak to a licensed insolvency practitioner as early as possible. Early advice can help you understand whether the business can be rescued or whether a formal insolvency process is necessary.
Taking action early protects creditors, preserves options, and reduces the risk of legal consequences for directors.
