Insolvency can happen to a company even if it has traded successfully for many years. Issues like losing a major contract or suppliers increasing their prices are outside of your control, but can have a serious impact on cash flow and whether you can afford to continue trading.
It’s normal for a company to have financial problems from time to time, but if these problems start to get worse and cash flow becomes a regular issue, it’s important to speak to an insolvency practitioner and get advice as early as possible.
What is insolvency?
A company is insolvent when it can’t pay its debts as they fall due, or when its liabilities are greater than the value of its assets. Once this happens, the directors must put the interests of creditors first and take steps to avoid the company’s debts growing any further, which will often mean stopping trading and seeking advice from an insolvency practitioner.
What does insolvency mean?
A company is insolvent if it can’t pay its debts when they’re due, which is known as the cash flow test, or if it owes more than it owns, which is known as the balance sheet test. Both tests are set out in section 123 of the Insolvency Act 1986, and a company only needs to fail one of them to be insolvent.
Most directors notice cash flow problems first, as they show up in missed payments, unpaid tax and bills to suppliers taking longer to pay. Balance sheet insolvency is harder to spot and can go unnoticed in the accounts for months.
People can also be insolvent, but personal debts are dealt with differently, through bankruptcy, an individual voluntary arrangement (IVA) or a debt relief order.
What is insolvency in business?
Business insolvency means the company can’t pay what it owes, rather than the directors who run it. A limited company is a separate legal entity from its directors, so the debts belong to the company, and in most cases the directors won’t have to pay them personally.
There are some situations where a director can become personally liable. If you’ve signed a personal guarantee for a lender or a landlord, that guarantee will still stand, and if you owe the company money through your director’s loan account, the liquidator can ask you to repay it. A court can also order you to contribute towards the losses if you kept trading when you knew, or should have known, that the company couldn’t avoid liquidation or administration.
Insolvency also changes how you’re allowed to run the business. You shouldn’t pay one creditor over others or sell assets for less than they’re worth, and the liquidator will review all transactions made in the run up to the insolvency to check for this.
When is a company insolvent?
A company becomes insolvent as soon as it can’t pay its debts when they’re due, or owes more than it owns. This happens whether or not the directors have realised it yet, and there’s no form to file or official date to mark it.
It sometimes only becomes clear when a company became insolvent by looking back at its accounts, bank statements and payment records, which is why an insolvency practitioner will review the months before they were appointed. The liquidator will decide when the company became insolvent and look at how the directors ran the business from that point onwards.
Reasons why a company becomes insolvent
Insolvency is rarely caused by one thing, and some problems can be out of the director’s control which have built up over time. Common causes of business insolvency include:
- Cash flow problems
Customers may be paying late while suppliers, staff and HMRC still expect to be paid on time, or your costs may be rising faster than you can increase your prices. - Losing a major customer
Where one client makes up a large part of your turnover, losing them can leave costs that the rest of your work can’t cover. - Debt the business can’t afford
Loans, asset finance and Bounce Back Loans which were affordable when turnover was higher can become difficult to repay if the business is affected by a drop in sales. - Tax arrears
Unpaid VAT and PAYE are one of the most common reasons a company ends up in a formal insolvency process, as interest and penalties will continue to add to the amount owed. - Out of date figures
If your management accounts haven’t been kept up-to-date, you’ll be making decisions based on figures that no longer show how the company is actually doing.
Most of these problems can be dealt with if they’re caught early. It becomes more difficult when several happen at the same time, or when directors wait to see whether trading improves before getting advice.
Is my company going insolvent?
If your company is heading towards insolvency or is already insolvent, there will be signs to look out for, and they may include:
Payment demands
If you’re starting to need longer to pay company creditors, have regular disputes over payments and are unable to buy stock, then it is likely your company is in financial difficulty and could be heading towards insolvency.
If you have received a statutory demand, which is a formal written demand for payment, then this is a more serious stage as the creditor can ask the court to wind your company up, which could end up in a compulsory liquidation.
Bounce Back Loans
If you took out a Bounce Back Loan during the Coronavirus pandemic, you may now be finding it hard to make the repayments as they fall due. The loan may have been a lifeline for keeping your company running during that difficult time, but the effects of the pandemic are still being felt by many businesses, and now you have the loan repayments to meet on top of your other debts.
A Bounce Back Loan is still a company debt, and falling behind on it is treated in the same way as falling behind with any other creditor.
HMRC
Not being able to pay your tax bill to HMRC is a sign that your company is facing insolvency or is already insolvent. Penalties for unpaid tax are very high and will make your financial situation worse if you ignore them.
HMRC is one of the most active creditors when it comes to chasing payment, and it can ask the court to wind your company up.
Unable to pay wages
Being unable to pay yourself and your staff is a big sign of insolvency. Once you start to miss wage payments, it can be difficult to put right.
If you are unable to pay your staff wages, then contact us now for guidance.
Cash flow and balance sheet insolvency
There are two types of insolvency, which are cash flow and balance sheet insolvency, and your company only has to meet one of them to be insolvent.
You are cash flow insolvent if your company cannot pay what it owes when it falls due. You can sell assets to raise the money, but in most cases this cannot be done in time, or the assets are not worth enough to cover the debts, which leaves the company cash flow insolvent.
You are balance sheet insolvent if your company owes more than it owns, which leaves it unable to pay its debts on time. This includes debts that fall due in the future, not only the ones outstanding now.
Both cause real problems for your company, and you should act on either one. If you would like a free no obligation health check with one of our in house experts, contact us now.
Types of insolvency
When people talk about types of insolvency, they usually mean one of two things. It can refer to the two legal tests, cash flow insolvency and balance sheet insolvency, which are explained above. It can also refer to the formal insolvency processes a company can go through, which are set out below.
Company insolvency and personal insolvency are dealt with separately. Bankruptcy, individual voluntary arrangements and debt relief orders are for individuals, and the Liquidation Centre only works with limited companies.
Insolvency procedures
Where a company is insolvent, there are several formal insolvency procedures available under the Insolvency Act 1986. Which one is right for your business will depend on whether it can be saved, what your creditors are likely to agree to, and how much time you have.
| Insolvency procedure | What it does | Usually suitable for |
|---|---|---|
| Company Voluntary Arrangement (CVA) | An agreement to repay creditors over a set period, usually three to five years, while the company keeps trading. | A company with a viable future that just needs more time to pay debts. |
| Company Administration | An administrator takes over and creditors are stopped from taking action while the business is restructured, sold or closed down. | Viable businesses with something worth saving or selling. |
| Creditors’ Voluntary Liquidation (CVL) | You choose to close the company, and a liquidator sells the assets and pays out to creditors. | Insolvent companies with no realistic future. |
| Compulsory Liquidation | A creditor applies to the court and the court orders your company to be wound up. | Companies that have not acted on a debt or a statutory demand. |
| Restructuring Plan | A plan approved by the court that can be binding on creditors who vote against it. | Larger companies with complicated creditor groups. |
How do you file for insolvency?
Filing for insolvency usually means placing your company into a Creditors’ Voluntary Liquidation (CVL), which is the most common route for a company that can’t pay its debts.
The steps are:
- Get advice
An insolvency practitioner will review your company’s position with you and explain which options are available. - Hold a board meeting
The directors agree to place the company into liquidation, nominate a licensed insolvency practitioner as liquidator and arrange a meeting of the shareholders. - Notify creditors and shareholders
Notice of the proposed liquidation is sent to creditors and shareholders, and creditors are given at least three business days’ notice of the decision on the liquidator’s appointment. - Prepare a statement of affairs
This sets out what the company owns, what it owes and who it owes money to. The insolvency practitioner will help the directors prepare it, and it will be sent to creditors along with a report on the events leading up to the liquidation. - Pass the resolution
At the shareholders’ meeting, the shareholders vote to place the company into liquidation and appoint the liquidator. - Confirm the liquidator
Creditors may be asked to confirm the liquidator’s appointment through deemed consent, which means it is approved unless creditors object. Creditors can request a physical meeting if they want to consider a different liquidator. Alternatively, a virtual meeting can be held to approve the liquidator’s appointment.
Once the liquidator has been appointed, they will take control of the company and deal with its assets, its creditors, including HMRC and Companies House on your behalf. If a creditor has already issued a winding up petition against your company, your options will become more limited, so it’s important to get advice as soon as possible.
How long does insolvency take?
Starting an insolvency process is usually quicker than directors expect. When you contact a liquidation company, they will be able to give you guidance about your situation over the phone straight away, then starting the liquidation process and appointing a liquidator can take around two to three weeks.
The overall process can take six to twelve months, but can sometimes be longer. The main factors that affect the timeline include:
- How many creditors there are
- Whether there are assets to realise
- How long it takes to resolve outstanding creditor claims
- Whether there are any matters requiring further investigation
An administration can be put in place within days if the paperwork is in order, and a CVA proposal will usually reach a creditors’ vote within four to six weeks.
What is an insolvency order?
An insolvency order is a court order made against a company who cannot pay their debts. Known as a winding-up order, or a compulsory liquidation, an insolvent company can receive a court order forcing it to close. These orders are typically initiated by creditors via a winding-up petition, and a liquidator is appointed to formally close down the company and sell off the company’s assets to repay creditors according to a strict legal hierarchy.
What happens when a company becomes insolvent?
If you think your company is insolvent, you have a legal duty to act in the best interests of your creditors and make sure you do not make their losses any worse. Continuing to trade insolvent without dealing with the situation can leave you personally liable, so this may mean stopping trading so the company’s debts do not get any worse.
Once you know your company is insolvent, you should speak to an insolvency practitioner, who will take the time to understand your situation and explain the options available to you.
A CVL is often used to close an insolvent business. During the process, the liquidator will value and sell your company’s assets, share the proceeds fairly between your creditors where possible and close the company down. A CVL cannot go ahead without an insolvency practitioner being appointed as liquidator, and being prepared for what happens in an insolvent liquidation process
Most often in an insolvent liquidation, there is not enough money to pay every creditor in full, so the liquidator pays creditors in a set order:
| Order | Who is paid | What this covers |
|---|---|---|
| 1 | Lenders with security over a specific asset | Paid out of that asset, for example a mortgage on a building |
| 2 | Costs of the liquidation | The liquidator’s fees and the costs of running the process |
| 3 | Preferential creditors | Unpaid wages and holiday pay owed to staff, then VAT, PAYE and employee NI owed to HMRC |
| 4 | Prescribed part | A slice of the remaining money that is set aside by law for unsecured creditors |
| 5 | Lenders with security over general assets | Lenders holding security over things like stock |
| 6 | Unsecured creditors | Suppliers, trade creditors, customers owed deposits and lenders with no security, along with other debts to HMRC like corporation tax |
| 7 | Shareholders | Anything left over, which in an insolvent liquidation is rare |
The liquidator will also report to the Insolvency Service on how the directors behaved. Getting advice early and keeping a clear record of the decisions you make can help show that you acted properly as a director.
If misconduct is found by the Insolvency Service, you could face a ban from being a director or ordered to pay creditors personally. The liquidator can also look at what you did before the process started, including payments that put one creditor ahead of the others, assets sold for less than they were worth, wrongful trading and money you took through your director’s loan account.
How long do you stay on the insolvency register?
The Individual Insolvency Register covers people rather than companies, so you will not appear on it as a director because your company has been liquidated. Companies House will show that the company went into liquidation and was closed, and that stays on the public record.
The Register of Disqualified Directors lists anyone who has been banned from acting as a director, with bans running from two to fifteen years, and the entry is cleared once the ban ends.
If a company is insolvent, who pays redundancy?
When a company is insolvent, its staff claim redundancy from the National Insurance Fund through the Redundancy Payments Service, and the liquidator will give them the reference number they need to make the claim.
| What you can claim | Limit | Tax |
|---|---|---|
| Statutory redundancy pay | Based on age, length of service and weekly pay, up to the weekly cap of £751 for redundancies on or after 6 April 2026 | Tax free |
| Unpaid wages | Up to eight weeks, up to the weekly cap | Taxed at 20% with National Insurance taken off |
| Holiday pay you have built up | Up to six weeks, up to the weekly cap of £751 for redundancies on or after 6 April 2026 | Taxed at 20% with National Insurance taken off |
| Notice pay | Based on length of service, up to the weekly cap of £751 for redundancies on or after 6 April 2026 | Taxed at 20% with National Insurance taken off |
In some cases, directors can also claim for redundancy, as long as you were employed by the company rather than paid only in dividends. You will need to show the Redundancy Payments Office that you were an employee, using payslips, bank statements, P60s and a contract. It is the Redundancy Payments Office and not the Liquidator who makes the decision on whether a director can make such claims.
Trading insolvent
What is trading insolvent?
Trading insolvent, also called insolvent trading or wrongful trading, means carrying on running the business even though you knew, or should have known, that the company could not avoid liquidation or administration. For example, taking deposits from new customers, ordering stock on credit or borrowing more money when there is no real prospect of paying any of it back.
It is not the same as trading while during a difficult period, and plenty of companies will go through periods of slow months with sales. What matters is whether you have good reason to believe the company could recover, and what you did once it was clear it wouldn’t.
Is trading while insolvent illegal?
Trading while insolvent is not a criminal offence in itself, but it can leave you personally liable for the company’s debts. Under section 214 of the Insolvency Act 1986, a court can order you to pay towards what the company owes if the liquidator finds wrongful trading in their investigations.
You could also be banned from acting as a director for between two and fifteen years, ordered to pay certain creditors directly, or made personally liable for some tax debts if HMRC issues a personal liability notice.
Bankruptcy and insolvency: What’s the difference?
Bankruptcy and insolvency may sound like similar situations, but they are not the same. Insolvency is when a person or a company can’t pay their debts when they’re due, or owes more than their assets are worth.
Bankruptcy is a formal, legal process designed to help individuals who are struggling with debt and they have no realistic way of paying it back. When someone goes bankrupt, a court-appointed official takes full control of their finances and control may subsequently pass to an independent insolvency practitioner. They will look at what the person owns, sell off assets (like a car or valuable accessories etc) to pay back as much money as possible to the people they owe, and then the remaining debt is wiped.
Liquidation and insolvency: What’s the difference?
Insolvency describes the company’s financial position, and liquidation is one of the routes available to formally close it. An insolvent company will not always be liquidated, because it may be able to enter a CVA and keep trading, or go into administration, where the business can be rescued or sold. A company that is being liquidated is also not always insolvent, as a MVL is used to close a solvent company and pay the remaining funds out to its shareholders.
What is insolvent liquidation?
Insolvent liquidation is the formal legal process used to close a company that cannot pay its debts. When a company is insolvent, the most common liquidation process is a Creditors’ Voluntary Liquidation, where directors choose to close their company to avoid further debt to creditors. If directors of a struggling business doesn’t voluntarily get advice on insolvency liquidation, a creditor can file a winding up petition to the court which can lead to a Compulsory Liquidation.
What are your insolvency options?
The insolvency options available to you will depend on whether the business is still viable and whether there has been a winding-up petition submitted. A business with a viable future that just needs more time to manage its debt may be able to use a CVA or a Time to Pay arrangement with HMRC.
Where part of the business can be saved, administration can pause creditor pressure while a restructure or a sale is looked at. If there is no realistic future, a CVL process can close the company properly, starting from around £3,000 plus VAT, which is usually paid out of the money raised from selling the assets. If you’re not sure which process is best for your situation, start with a free consultation with our insolvency experts to understand your options.
What is the Insolvency Service?
The Insolvency Service is the government body responsible for insolvency in England and Wales. It handles bankruptcies and compulsory liquidations through the Official Receiver, looks into how directors of insolvent companies have behaved, pays out redundancy money through the Redundancy Payments Service, and oversees how insolvency practitioners are regulated.
The Insolvency Service does not complete the liquidation process for you, directors appoint a licensed insolvency practitioner for this, and the Insolvency Service receives the liquidator’s report on the process and how the directors behaved.
How can the Liquidation Centre help with your insolvency options?
If you are worried about your company and what insolvency could mean for its future, we are here to listen to your situation and help you understand your options.
The Liquidation Centre has been helping companies through liquidation for over 25 years. Our experienced team will explain the process and support you during what can be a stressful time.
We will also tell you when a formal process is not the right answer, even where that means no work for us.
What we can do for you:
- A free and confidential review of where your company stands financially.
- A clear explanation of every option and what each one would mean in practice.
- A fixed quote, so you know the cost before you commit to anything.
- Clear and honest guidance from start to finish.
We are here to keep liquidations simple. Contact us today to discuss how we can help, or get a quote for liquidation today.
Insolvency FAQs
What does insolvent mean? ▸
Insolvent means being unable to pay your debts. Under the UK law a company is insolvent if it cannot pay its debts as they fall due, or if it owes more than it owns. The word is sometimes misspelled as insolvant, but the meaning is the same.
What does insolvent mean in business? ▸
The insolvent meaning in business is when a company is struggling to pay suppliers, staff wages, HMRC or other creditors. There are two tests for insolvency, and the first is the cash flow test, which looks at whether the company can pay its debts when they fall due. The second is the balance sheet test, which looks at whether the company owes more than it owns. A company only has to meet one of these tests to be insolvent.
Getting advice from an insolvency practitioner early can help you understand what options are available and reduce the risk of making the situation worse.
What is an insolvent company? ▸
An insolvent company is a legal entity that cannot meet its financial obligations or pay its debts when they are due. It does not always mean the company has to close, because options such as a CVA or administration may be able to turn a viable business around.
Is insolvency the same as bankruptcy? ▸
No, in the UK, bankruptcy applies to an individual, and a limited company cannot be made bankrupt. Insolvency is when a company is financially struggling and cannot pay its debts, and an insolvent company goes through a company process such as liquidation to close and try and repay creditors.
Is insolvency the same as liquidation? ▸
No, insolvency is the financial position a company is in, and liquidation is the formal process to close the company. Some insolvent companies may be eligible for a CVA or administration instead, and if the company is solvent, the liquidation process would be an MVL.
How can you check if a company is insolvent? ▸
If you’re worried that a company you’re trading with could be insolvent, you can check its public records on Companies House and the London Gazette. Companies House shows the company’s filing history, its accounts and any security registered against it, and the London Gazette publishes winding up petitions and the appointment of liquidators. Late filings or a winding up petition are usually a sign that the company is in financial difficulty.
How do you close an insolvent company? ▸
An insolvent company can be closed through a Creditors’ Voluntary Liquidation. If a company is insolvent, then it cannot be closed by applying to strike it off at Companies House, because a creditor can object, and directors who try to close a company with debts outstanding can face consequences such as personal liability and being banned from becoming a director.