How Insolvency Works

If your company is struggling to pay its debts to HM Revenue & Customs (“HMRC”)  or other creditors, it’s important to understand how insolvency works, what it means and the options that might be available to you. 

Contents

1. What is insolvency? (Insolvency meaning)
2. When is a company insolvent?
3. What insolvency means for employees
4. Insolvency procedures (Insolvency proceedings: How to file for insolvency)
5. Trading while insolvent
6. How long insolvency takes and what it costs
7. The insolvency register
8. UK insolvency law
9. Insolvency vs Liquidation
10. How to avoid insolvency
11. What to do if your company is insolvent (How to handle business insolvency)

Insolvency meaning

In the UK, a company is usually deemed insolvent when it cannot pay its debts as they fall due or when its liabilities are more than the value of its assets. This doesn’t always mean that your company has to cease trading, but it does mean you need to understand your responsibilities as a director and get guidance on your situation.

A company may be insolvent under either test. For example, a business might own valuable property and equipment but still be unable to pay its suppliers because it doesn’t have enough cash available. Equally, a company might continue paying its immediate bills but have liabilities that exceed the value of everything it owns.

Understanding insolvency in the UK is particularly important for company directors, as financial difficulties can affect their legal responsibilities and the decisions they’re permitted to make.

When is a company insolvent?

A company may be insolvent when it can no longer pay its liabilities as they fall due or when its liabilities exceed its assets. A business doesn’t have to stop trading before it can be considered insolvent. 

Common warning signs of insolvency include:

• Missing payments to HMRC, suppliers or lenders;
• Regularly relying on borrowing to cover everyday costs;
• Receiving statutory demands, court claims or winding-up petitions;
• Falling behind on VAT, PAYE or Corporation Tax;
• Being unable to meet payroll or rent obligations;
• Having more liabilities than assets.

If your company has missed one payment to a creditor, it doesn’t necessarily mean that it’s insolvent. If missing payments become a regular occurrence and you’re regularly struggling to meet your financial commitments, then you should speak to an insolvency practitioner about your situation and what options could be available. 

What does insolvency mean for a company?

If a company becomes insolvent, the outcome will depend on its financial position and whether there’s a realistic prospect of recovery.

An insolvent company may be able to enter into restructuring or another rescue process. If this isn’t possible, an insolvency practitioner can discuss formal insolvency procedures, such as Administration or Liquidation.

What does insolvency mean for employees?

When a company becomes insolvent, employees may be affected by unpaid wages, outstanding holiday pay, redundancy or lack of notice. 

If employees are made redundant because of an insolvent employer, they may be eligible to claim certain payments through the government’s Redundancy Payments Service (“RPS”) , subject to statutory limits. These may include:

• Statutory redundancy pay;
• Unpaid wages;
• Accrued holiday pay;
• Compensation for loss of notice pay.

The insolvency practitioner can provide information about the employer’s insolvency and the relevant claim process.

Employees can find further information through the official GOV.UK redundancy payments service.

Insolvency proceedings: How to file for insolvency

Insolvency proceedings are formal legal processes used to deal with the financial affairs of a company or individual who cannot pay their liabilities. 

For a limited company, the right procedure will depend on its financial position, whether it can be rescued and whether it needs to close.

There are several different routes, and the right option will depend on the company’s circumstances.

What are the insolvency procedures?

The main formal procedures for an insolvent limited company include Administration, a Company Voluntary Arrangement (CVA), Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation.

• Administration: An Administrator takes control of the company to try to rescue it, achieve a better result for creditors or realise assets for distribution to creditors in accordance with the statutory order of priority.
• CVA: A formal agreement allowing a company to repay some or all of its debts over an agreed period while potentially continuing to trade.
• CVL: A process used to close an insolvent company when its directors and shareholders decide it cannot continue.
• Compulsory liquidation: Usually follows a Court order after a winding-up petition, often presented by a creditor.

These procedures have different purposes. Administration and a CVA may provide opportunities to rescue a business, while Liquidation will formally close it down.

How do you start insolvency proceedings?

What is voluntary insolvency?

Voluntary insolvency is a general term for taking steps to address financial difficulties rather than waiting for a creditor or Court to force the issue.

For a limited company that cannot continue, one common route is a Creditors’ Voluntary Liquidation (CVL). Directors and shareholders initiate the required process, and a licensed insolvency practitioner is appointed to deal with the company’s affairs.

There isn’t one universal legal procedure called “voluntary insolvency”. The correct route depends on the company’s circumstances.

What does it mean if you trade while insolvent?

In England and Wales, directors who continue trading when a company is insolvent may face legal consequences, including claims for wrongful trading or fraudulent trading in certain circumstances. If your company is experiencing financial difficulties, it does not necessarily mean that trading must cease immediately, but directors should carefully consider whether continuing to trade could worsen the position of creditors.

If you believe your company is insolvent, you should understand your role as a director and seek advice from your accountant or a licensed insolvency practitioner, both of whom can help assess the company’s financial position and discuss the options available.

What is an insolvency notice?

An insolvency notice may refer to a formal notice relating to a company’s financial difficulties or insolvency proceedings.

For example, if a creditor presents a winding-up petition, it may result in the company being  compulsorily wound up if the Court makes an order.

Receiving an insolvency related notice, statutory demand or winding up petition should never be ignored. In particular, once a winding up petition has been presented and advertised, a company’s bank may freeze its accounts, which can severely restrict trading and access to funds. Directors should seek legal or insolvency advice immediately, as early action may provide more options for resolving the situation and protecting creditors’ interests. 

How to claim redundancy payments

If you’ve been made redundant because your employer is insolvent, you may be eligible to claim certain outstanding employment payments from the government.

You can submit a claim through the GOV.UK Redundancy Payments Service, which is administered by the Insolvency Service. You’ll need details of your employment, redundancy and your employer’s insolvency. The insolvency practitioner dealing with the case will provide the information required to support your claim.

How long does insolvency take?

How long insolvency takes depends on the procedure, the company’s financial position and the complexity of its affairs.

A straightforward Liquidation may progress more quickly than a case involving complex assets, disputed claims, creditor disputes or investigations into company transactions.

An insolvency practitioner can provide a more realistic estimate on how long an insolvency process may take once they’ve assessed the company’s circumstances.

How long does insolvency last?

There isn’t a single timeframe for how long insolvency lasts, and it will usually depend on whether the company enters Liquidation, Administration or another formal procedure.

During Liquidation, the liquidator will deal with any remaining company assets, creditor claims and other statutory responsibilities. Once the process is complete, the company is dissolved.

How long insolvency information remains visible on public records is a separate matter and depends on the register and type of record involved.

How much does insolvency cost?

The cost of insolvency depends on the procedure, the complexity of the case and the work required from the insolvency practitioner and other professionals such as solicitors and accountants.

There isn’t one fixed price for every insolvency case, but you’ll be given a clear explanation of the fees and any additional costs before proceeding.

The insolvency register

The insolvency register is a set of public records relating to company or personal insolvencies. 

What is the insolvency register?

For limited companies, you can search Companies House for company information, including details of directors, accounts filings, confirmation statements and changes to a company’s status.

Formal insolvency appointments and notices, including Administrations, Liquidations, winding-up petitions and notices to creditors, are often published in The Gazette, the UK’s official public record.

Checking both Companies House and The Gazette can help determine whether a company has entered a formal insolvency procedure, although there may be a delay before information is published or updated.

Individual insolvency records are separate from company records, and the appropriate register will depend on the type of insolvency procedure and the jurisdiction involved.

How long do you stay on the insolvency register?

How long insolvency information remains available depends on the type of record and procedure involved.

Company information filed at Companies House can remain part of the company’s public record even after it has been dissolved. Notices published in The Gazette may also remain available through its archive.

UK insolvency law

UK insolvency law establishes the legal framework for dealing with companies and individuals who cannot pay their debts.

For limited companies, it covers how insolvency procedures begin, the responsibilities of directors, the treatment of creditors and the circumstances in which a business may be rescued or closed.

What is insolvency law?

Insolvency law is the body of legislation and legal principles governing what happens when a company or individual cannot meet their financial obligations.

For companies, it provides formal procedures for dealing with debts, realising assets, distributing funds to creditors and, where appropriate, restructuring or closing the business.

It also establishes duties and safeguards designed to protect creditors and ensure that insolvency proceedings are conducted properly.

What is corporate insolvency law?

Corporate insolvency law specifically focuses on the insolvency of companies and other corporate entities.

In the UK, it governs procedures such as Administration, Company Voluntary Arrangements and Liquidation, alongside issues including directors’ duties, creditor rights and the investigation of company affairs.

Depending on the circumstances, the aim may be to rescue the company, achieve a better outcome for creditors or close the business in an orderly manner.

What is the Insolvency Act 1986?

The Insolvency Act 1986 governs and provides the legal framework for a range of insolvency procedures, including Liquidation, Administration, arrangements with creditors and personal insolvency.

The Act sets out important rules concerning the treatment of assets and creditors and the appointment and responsibilities of insolvency office-holders. 

The legal requirements depend on the procedure and circumstances. Directors should seek professional advice if they’re unsure how the law applies to their company.

Liquidation vs insolvency: What’s the difference?

A company becomes insolvent when it cannot pay its debts as they fall due or when its liabilities exceed its assets. Liquidation is the formal process of bringing the company’s affairs to an end, dealing with its assets and distributing any available funds to creditors.

A company can be insolvent without needing to enter Liquidation, as it may be able to restructure its debts, enter Administration or find another suitable option.

Insolvency	Liquidation
A financial condition.	A formal process for winding up a company.
Doesn’t automatically mean the company must close.	Results in the company ceasing to exist once the process is complete.
May lead to restructuring, Administration or Liquidation.	The Insolvency Practitioner deals with company assets, liabilities and creditor claims once the Company is in Liquidation.

If your company is insolvent and cannot recover, Liquidation may be an appropriate way to close the business and deal with its debts.

How to avoid insolvency

Because insolvency can be caused by factors outside a business’s control, it can’t always be prevented, but by having a better understanding of its financial health, you’ll spot a potential problem quicker. 

If your business is struggling financially or is already insolvent, contact us today and we’ll help you to understand your legal responsibilities and determine the most appropriate way forward.

How to handle business insolvency

Discovering that your company is insolvent can be a very stressful time, particularly if you’re worried about creditor action, outstanding tax liabilities or your position as a director.

Speaking to an insolvency expert as soon as possible will help you to understand your options and avoid making the situation worse.

1. Establish the extent of the problem. Review bank balances, outstanding invoices, creditor balances, tax liabilities and future commitments.
2. Protect company assets and records. Keep accurate records and avoid transferring assets or making payments that could unfairly disadvantage creditors.
3. Understand your responsibilities. Consider creditor interests and seek advice before making decisions that could affect the company’s financial position.
4. Address creditor demands. Check letters, statutory demands and court documents carefully, including any deadlines.
5. Explore your options. Depending on the circumstances, your company may be able to restructure, enter Administration or pursue Liquidation.
6. Seek professional guidance. A licensed insolvency practitioner can assess the company’s position and explain the procedures available.

How an insolvency company can help with the insolvency process

An insolvency company, like the Liquidation Centre, can help directors understand their options when a business is experiencing financial difficulties.

The right option will depend on the amount the company owes, its assets, creditor pressure and whether the business has a realistic prospect of recovery.

The Liquidation Centre can help directors understand the company insolvency process, including whether Liquidation may be appropriate. If a Creditors’ Voluntary Liquidation is the right option, the formal process must be handled by a licensed Insolvency Practitioner.

If you’re worried about your company’s debts, we can talk to you about your circumstances and understand the next steps that may be available.

FAQs on How Insolvency Works

What is insolvency? ▸

Insolvency is a financial condition when a company or individual cannot pay their debts as they fall due or the liabilities are larger than the value of their assets. For a limited company, insolvency can lead to restructuring, Administration or Liquidation.

What is an insolvent company? ▸

An insolvent company is a business that cannot meet its financial obligations or whose liabilities exceed its assets under the relevant insolvency tests. If a company is insolvent, it doesn’t always mean that closure is the only option, but the directors have to consider their legal responsibilities and the interests of creditors.

What is insolvency in business? ▸

Insolvency in business is when a company cannot pay its debts or has liabilities larger than its assets. It may result from cash flow problems, a loss in revenue, increasing costs or unpaid tax liabilities.

Is insolvency the same as liquidation? ▸

No, insolvency is when a company is in a negative financial state, and Liquidation is a formal process for winding up a company. An insolvent company may enter Liquidation, but restructuring or Administration may be possible in some circumstances. A solvent company can also enter Liquidation through an appropriate solvent procedure, known as a Members’ Voluntary Liquidation (MVL). 

Is insolvency the same as bankruptcy? ▸

No, insolvency is a general term describing an inability to meet financial obligations. Bankruptcy is a formal legal process that applies to individuals in England and Wales, rather than being the standard procedure for closing an insolvent limited company.

An insolvent limited company may enter Administration, a Company Voluntary Arrangement or Liquidation, depending on its circumstances. Scotland has different personal insolvency procedures.