What are the warning signs of company insolvency?

Julie Palmer

Managing Partner and Licensed Insolvency Practitioner

Updated

5 August 2026

A limited company can be said to be technically insolvent when it is unable to repay money owed and fulfil financial obligations such as bills and contractual monthly repayments as and when they fall due. A company can also be said to be insolvent if its liabilities (debts) outweigh its assets (the things it owns).

When directors are caught up in the day-to-day running of their company, it is very easy to miss the signs of approaching insolvency. It is perhaps easier to attribute cash flow problems to a temporary blip in your company's finances rather than consider the fact that this could hint at deeper rooted problems. However, the sooner you accept the problems you are facing, the sooner a plan can be put in place to get your business back on a solid financial footing.

There are a number of signs you should be on the lookout for if you believe your company could be approaching - or may already be - insolvent. If you are experiencing one or more of the problems described below, you may need to seek guidance on company insolvency procedures from a licensed insolvency practitioner in order to avoid further complications.

"Something we hear time and time again from directors is ‘I knew something was wrong, but I kept hoping it would get better.’ The warning signs are usually there for months before a director picks up the phone. The earlier you acknowledge the issues, the more options you have.”
— Julie Palmer, Partner, BTG Begbies Traynor

Recognising the warning signs of company insolvency

There are a number of warning signs of impending insolvency that all company directors should be aware of. The following is not an exhaustive list, but are among the most common signs we see that lead to directors contacting us for formal insolvency advice:

Reaching maximum borrowing limit

You have reached the limit of your bank overdraft and have been refused further borrowing without providing personal guarantees. Suppliers are refusing you credit, and you do not own sufficient assets to obtain a secured short-term loan. If payments from your company have bounced, this will cause more problems with suppliers who may decide to take legal action in the form of a statutory demand.

Demands for payment from creditors

You may have received a statutory demand from a secured or unsecured creditor, or are constantly receiving threats of legal action against the company for unpaid bills. A statutory demand is often closely followed by a winding up petition, which could effectively mark the end for your business should the courts order that the company is liquidated.

If HMRC are chasing you for payment, the company is already in the danger zone as they are relentless in the pursuit of bad debts. Penalties for late payment of tax can be significant, making a dire financial situation untenable. 

Other warning signs in relation to creditors include:

• Taking an increasingly longer period of time to pay trade creditors
• Dealing with complaints by creditors, and ‘firefighting’ issues on a daily basis
• Deliveries of stock are delayed and production/sales are falling behind as a result.

No money to pay staff wages

If the likelihood of meeting the wage bill is slim, this is a sure sign that insolvency is looming. You may not have taken a salary from the business yourself for a few months in the hope that the next big sale will correct the situation, but it is very rarely the case, and once employee’s wages go unpaid your company is already technically insolvent.

Using personal money to fund the business

If you’re using personal savings, personal credit cards, or loans against your home to keep the company going, this is one of the clearest warning signs of insolvency. It also creates a directors’ loan account entry that becomes a liability in insolvency.

“Many of the directors who contact us have already been propping up the business with personal money for months. By that point, the company has usually been insolvent for some time and the director has also put their own finances at risk. If you’re reaching for personal funds to cover business costs, that’s the signal to call us.”
- Julie Palmer, Partner, BTG Begbies Traynor

Robbing Peter to pay Paul

If you’re regularly delaying payment to one creditor in order to pay another, for example, skipping a VAT payment to cover the wage bill, or delaying a supplier to keep up with rent, this is a classic sign of cash flow insolvency that should not be ignored. It may feel like you’re managing the situation as no creditor is going unpaid, but in practice you’re simply cycling debt rather than reducing it, and that cannot continue indefinitely.

Falling behind on HMRC filing obligations

Late VAT returns, missed PAYE submissions, and overdue corporation tax filings are major warning signs that a business is under pressure. HMRC’s penalty points system means that late filings now compound quickly, adding financial pressure on top of the underlying cash flow problem.

Over-reliance on a single client

If the loss of one client would make the company insolvent, the business is structurally fragile. This is a common issue in professional services, construction subcontracting, and companies in supply chains dominated by a single buyer. While this in itself is not a sign of insolvency, it can place you at greater risk of future insolvency should this source of work dry up, or even go insolvent themselves.

Understanding the insolvency tests for limited companies

A company is said to be insolvent if it cannot pay its bills as they fall due, or the total of its liabilities exceeds the total value of assets.

There are two tests to determine if either or both of the above are true:

Cash flow test

Being able to pay debts as they presently fall due, as well as those which fall due in the ‘reasonably near future’ is the general test for cash flow. The term ‘reasonably near future’ depends in part on the industry in which you operate, and the nature of your business.

If your creditors impose 30-day terms for payment and you regularly fail to adhere to these terms, paying only after 90 days for example, it is likely that you are trading while insolvent.

This is often the first sign of potential problems, which is why regular monitoring of the company’s financial position is so important. Other strong indications of insolvency are:

• Failing to meet a 21-day statutory demand for payment of more than £750.
• Failing to adhere to the terms of a court order or judgment.

If you are found to be insolvent but still trading, as a director you would face allegations of wrongful trading, and may become personally liable for some or all of the company’s debts.

Balance sheet test

This tests the likelihood of the value of your assets being less than your liabilities. To determine this with any accuracy you will need to appoint an independent expert to value company assets correctly, and take into account all contingent liabilities.

Should liabilities exceed assets, you would be unable to repay creditors as there would be insufficient funds even if you sold all the company’s assets. Therefore, it can be said that your company is on the verge of insolvency if the figures for liabilities and assets are comparable.

Even if this test appears to indicate that the company is solvent, the cash flow test could return a less hopeful result. That is why it is important to view the results as a whole, as well as independently.

“If you recognise three or more of the warning signs on this page, your company may already be insolvent. That doesn’t necessarily mean this is the end for your business, but it does mean you need to speak to a professional now, not next month. The difference between acting this week and acting in six weeks can be the difference between rescue and closure.”
- Julie Palmer, Partner, BTG Begbies Traynor

What to do if your company is insolvent

If your company is insolvent, or if insolvency has become likely, your legal duties as a director change. Under section 172 of the Companies Act 2006, you must now act in the best interests of the company’s creditors. This means you should not take on new commitments the company cannot meet, should not pay yourself or connected parties ahead of other creditors, and should seek professional advice before making significant decisions.

If you believe your company is insolvent, or if the warning signs above apply to your situation, the most important step is to seek professional advice from a licensed insolvency practitioner. The options available to you depend on whether the business can be rescued or whether an orderly closure is the most responsible course of action:

If the business is viable but carrying unmanageable debt: A Company Voluntary Arrangement (CVA) can restructure your debts into affordable monthly payments while the business continues trading. Company administration provides court protection from creditors while a rescue plan is developed.

If the business is no longer viable: A Creditors’ Voluntary Liquidation (CVL) is the most common and orderly way to close an insolvent company. It protects creditors, gives employees access to the Redundancy Payments Service, and demonstrates that you acted responsibly as a director.

For a full assessment of your options, see our guide to how to save a failing company.

What we typically see

A director of a construction company contacted us after recognising several warning signs that their business could be on the road to becoming insolvent. They had maxed out the company’s overdraft, were three months behind on VAT payments, and had been delaying supplier payments for weeks at a time to keep the wage bill covered. They had also put £15,000 of personal savings into the business over the previous four months. 

After assessing the company’s position, we confirmed that it was cash flow insolvent but the underlying business was actually viable; their order book was strong, but a combination of late-paying clients and accumulated HMRC debt was strangling cash flow. We proposed a CVA that restructured the HMRC debt and the supplier arrears into affordable monthly payments. The CVA gained creditor approval, the company continued trading, and the director recovered their personal investment within six months as cash flow improved. They told us afterwards that the warning signs had been there for a year before they acted.

What to do if you recognise the warning signs of insolvency in your company

1. Assess your company’s financial position with brutal honesty. If you recognise three or more of the warning signs on this page, your company may already be insolvent. Hoping the situation will improve or ignoring it altogether, is the worst thing you can do. While taking advice is a difficult step to take, it is always the right one.
2. Stop using personal money to prop up the business. If the company is insolvent, continuing to inject personal funds into it, could place your personal finances and assets at risk. Many businesses are a bottomless pit that will swallow up as much money as you throw into them. Knowing when to stop throwing good money after bad is crucial.
3. Run the cash flow and balance sheet tests. Ask your accountant to prepare or review a current cash flow forecast and a balance sheet. This will give you a clear picture of whether the company is technically insolvent.
4. Speak to a licensed insolvency practitioner. A free initial consultation will tell you where you stand, what your options are, and whether the business can be saved. This conversation is confidential and without obligation.
5. Don’t wait for a creditor to force the issue. Once a statutory demand or winding-up petition is served on your company, the options narrow dramatically. Acting now, while you still have choices, is always better than reacting to enforcement.

How BTG Begbies Traynor can help

If you are starting to recognise the warning signs of insolvency in your company, the most important thing you can do is act now. The earlier you seek advice, the more options are available. 

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation. We speak to directors in your position every day, and we’ll give you an honest assessment of where you stand.