Company Insolvency

Company insolvency — your options explained

If your company is struggling financially and you’re worried about its future, you’re not alone. At BTG Begbies Traynor, we speak to directors in your position every single day. Whatever your situation, there are options available and the sooner you explore them, the more choices you’ll have.

This page explains what insolvency means, how to tell whether your company is insolvent, and the different routes open to you, whether that’s rescuing the business, restructuring its debts, or closing it down in an orderly way.

What does it mean when a company is insolvent?

A company is insolvent when it cannot pay its debts as and when they fall due. There are two legal tests for insolvency:

• Cash flow insolvency: your company cannot pay its debts and other outgoings as they fall due. This includes bills from suppliers, tax payments to HMRC, staff wages, rent, and bank loan repayments. If you’re regularly paying suppliers late, struggling to meet payroll, or juggling payments to keep creditors at bay, your company may be cash flow insolvent.

• Balance sheet insolvency: the total value of your company’s liabilities (everything it owes) exceeds the total value of its assets (everything it owns). This calculation should also include contingent liabilities which are debts that may become payable in future, such as pending claims or guarantees.

A company only needs to fail one of these two insolvency tests in order to be considered insolvent. In practice, cash flow insolvency is the more common trigger as most directors recognise their company is in trouble when the bills start going unpaid and creditors become increasingly impatient, rather than when they run a balance sheet comparison.

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How do I know if my company is insolvent?

There are several warning signs of insolvency that directors should look out for:

• You’re consistently paying creditors late or beyond agreed terms
• You’ve reached the limit of your overdraft and been refused further borrowing
• Suppliers are refusing to extend credit or demanding payment upfront
• You’re struggling to meet the payroll or haven’t paid yourself for several months
• HMRC are chasing you for unpaid VAT, PAYE, or corporation tax
• You’ve received a statutory demand or winding-up petition from a creditor
• You’ve received a CCJ or are facing enforcement action
• HMRC enforcement officers have visited your premises or you’ve received a notice of enforcement

If any of these apply, your company may already be insolvent, or on the route to becoming insolvent. The important thing is to get professional advice before the situation worsens.

What are your options if your company is insolvent?

The right option depends on whether the underlying business is viable. If it can be saved, there are rescue and restructuring routes. If it can’t, there are orderly ways to close it down that protect both you and your creditors.

Rescue and restructuring options for insolvent companies

If your company is fundamentally viable but struggling with debt, cash flow, or creditor pressure, one of these rescue routes may allow it to survive:

Company Administration

Company Administration provides immediate protection from creditor action through a legal moratorium. An administrator, who must be a licensed insolvency practitioner, is appointed to take control of the company and work towards one of three objectives: rescuing the company as a going concern, achieving a better outcome for creditors than an immediate winding-up would, or realising the company’s assets to make a distribution to secured or preferential creditors.

Administration is often used when a business needs breathing space to restructure, find a buyer, or negotiate with creditors. It can also be the route to a pre-pack administration, where the business and its assets are sold to a new company as a going concern.

Company Voluntary Arrangement (CVA)

Company Voluntary Arrangement (CVA) is a legally binding agreement between your company and its creditors to repay a proportion of the company’s debts over a fixed period, typically three to five years. The company continues to trade during the CVA and uses future profits to fund the agreed repayments.

A CVA requires approval from at least 75% of creditors by value. It’s most suitable for companies that are still trading profitably but have built up unsustainable levels of debt. The key advantage is that the company survives and creditors receive more than they would in a liquidation.

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Closure and liquidation options for insolvent companies

If your company cannot be rescued, closing it down in an orderly, legally compliant way may be the best course of action both to protect your creditors and also to protect yourself as a director.

Creditors' Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation – or CVL is the most common way to close an insolvent company. You, as the director, make the decision to liquidate often following growing creditor pressure and a realisation that the company cannot continue to trade. A licensed insolvency practitioner is appointed as liquidator to sell the company’s assets, distribute the proceeds to creditors in the statutory order of priority, before applying to Companies House to dissolve the company. Any remaining debts which cannot be repaid are written off as part of the liquidation process (unless personally guaranteed).

A CVL demonstrates that you’ve acted responsibly and put creditors’ interests first. It is almost always preferable to waiting for a creditor to force the company into compulsory liquidation against your will.

Compulsory Liquidation

Compulsory Liquidation is not something you choose. Instead it’s something that is forced upon your company by one or more creditors. The compulsory liquidation process is initiated via a winding up petition being served against you. A creditor petitions the court for a winding up order, and if granted, an Official Receiver is appointed who immediately takes control of the company. The directors lose all control, bank accounts are frozen, and the investigation into director conduct often accounts for the fact that the company was forced into liquidation, rather than the director being pro-active about the situation they found themselves in.

What are my responsibilities as a director of an insolvent company?

When your company becomes insolvent, your legal duties as a director change. You must stop prioritising the success of the company and your fellow shareholders, and instead put your creditors’ interests first. In practical terms, this means you should:

• Stop trading as soon as you know the company is insolvent, to avoid accruing further debts it cannot repay
• Preserve the company’s assets, meaning you should not sell, transfer, or dispose of them outside the normal course of business
• Treat all creditors fairly and ensure you do not pay one creditor ahead of others unless there is a legal obligation to do so
• Seek professional advice from a licensed insolvency practitioner as soon as possible
• Keep accurate, up-to-date financial records

If you continue to trade while knowingly insolvent, you risk being accused of wrongful trading under Section 214 of the Insolvency Act 1986. The consequences can include personal liability for company debts, financial penalties, and director disqualification for up to 15 years.

For a full guide to your duties, see our article on what happens to directors of an insolvent company.

Will I be personally liable for my company’s debts?

In most cases, a director will not be held personally liable for the debts of their limited company. This is because a limited company is a separate legal entity from its directors who are protected by limited liability. This means you are typically not personally responsible for the company’s debts should it becomes insolvent.

However, there are exceptions. You may be personally liable if:

• You have provided a personal guarantee for company borrowing
• You have an overdrawn director’s loan account that needs to be repaid
• Evidence of wrongful or fraudulent trading is discovered
• You engaged in transactions at undervalue or made preference payments to certain creditors when the company was knowingly insolvent (or if the transaction caused the company to become insolvent).

The best way to protect yourself from personal liability is to seek professional advice at the earliest signs of company insolvency. This demonstrates your desire to act responsibly and in accordance with your legal duties as the director of an insolvent limited company.

What is an insolvency practitioner and why do I need one?

An insolvency practitioner is a licensed professional authorised to act in formal insolvency procedures. Only a licensed insolvency practitioner can be appointed as a liquidator, administrator, or CVA supervisor. Insolvency practitioners are regulated by one of several recognised professional bodies and must hold appropriate qualifications and insurance.

Beyond the legal requirement, an insolvency practitioner provides objective, expert advice at a time when you need it most. They’ll assess your company’s situation honestly, explain your options clearly, and handle the chosen formal insolvency process from start to finish.

Where can I get free insolvency advice?

BTG Begbies Traynor offer a free, no-obligation initial consultation to every director who contacts us. We’ll assess your company’s financial position, explain whether it’s insolvent, and set out the options available to you. The conversation is completely confidential. For more on accessing free advice, see our guide on how to get free insolvency advice for your business.

What should I do if my company is insolvent?

If your company is in financial difficulty, the single most important thing you can do is get professional advice from a licensed insolvency practitioner as early as possible. The more time passes, the more your options narrow. We deal with company insolvency every single day, and we understand the stress you’re under.

Whether your company can be saved or needs to be closed, we’ll help you understand your position and be with you to take the right next step.