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What is business insolvency in the UK?

What is business insolvency in the UK?  A limited company in the UK remains insolvent once it cannot repay its debts as and when they fall due.

To check if your company is solvent, two simple tests exist.

  1. Cash flow insolvency – your business has a cash flow crisis, resulting in it not having the capacity to pay its debts as and when they require payment as per the terms it agreed. The company then is insolvent.
  2. Balance sheet insolvency: That is, when a company’s total liabilities outweigh its total assets. But it may still pay its liabilities when they are due. Often unplanned debts may occur, including a larger than average HMRC bill. The company has not yet budgeted its payment. However, it will not pay it in its foreseeable cash flow.

A limited company may be considered insolvent by its balance sheet if contingent liabilities exceed its assets. Contingent liability is those debts that are yet not payable, but will eventually. 

If your business fits both situations, then act quickly while ensuring that you minimise your creditors’ risk. There is also a legal action test of insolvency, a follow-on from the insolvency cash flow test.

Facing Business Insolvency and when?

Company directors are required to understand the prospects of insolvency in business and the resulting consequences.

Insolvency has a significant impact on the future of you as a director personally and your company. Therefore, ensure you seek out your options sooner than later. If your company does not suffer financially, then still explore alternatives if the scenario happens.

To be prepared financially, we explain the insolvency that insolvency practitioners may apply to a limited company registered in England and Wales.

Important Warning Signs of Limited Company Insolvency

What is business insolvency in the Uk and the warning signs to watch for, including:

  • When Company Directors freeze their salary;
  • Bank overdraft continually breached;
  • Any threat of legal action against the company for non-payment;
  • Pressure from creditors of the company;
  • Borrowing applications rejected;
  • HMRC arrears.

As a company director, it is essential that you comprehend the signals of insolvency. Please read our page on the implications for directors.

What Are My Options as a Director When Faced With Insolvency?

Insolvency threatens your business to close. However, several options exist when insolvent. Some options allow the limited company to continue trading, avoiding closure.

Please note: Once you are aware your limited company is insolvent, you remain required to take immediate action to protect your creditor’s position as a company director. Failing to do so may cause you to be held liable for your company’s debts.

Obtaining Support & Advice From An Expert Or An Insolvency Practitioner

Dealing with corporate insolvency can be a torturous process for directors when experiencing financial stress. Therefore, seek qualified advice as soon as possible. Those who may assist in the UK are:

  • Licensed insolvency practitioner;
  • Solicitors;
  • Citizens Advice Bureau;
  • Qualified accountant;
  • Debt-advice centre;
  • Independent financial advisers.

However, note only a licensed insolvency practitioner (IP) may legally protect England and Wales’s business. IPs are officers of the court and remain the only licenced entities authorised to deal with company debt writing.

Please contact HBG Advisory on 0330 056 3120 if you want to talk confidentially.

Your options are: 

Agree on an informal settlement with your company creditors

Contacting your company’s creditors is essential once you are aware of your company’s financial situation.

Often, creditors will agree to a payment plan, then face a bad debt in insolvency. Timing is of the essence, and you must act before any legal action commences.

Company directors, though, must note informal agreements remain not legally binding by either side. Please note that a creditor can, at any point, still take legal action. However, an informal agreement lets companies trade on providing their financial position, and their creditors do not deteriorate further. Therefore, ensure your business is viable and can afford the arrangement along with day to day trading costs.

Enter into a Company Voluntary Arrangement (CVA)

Like the previous option, a Commpany Voluntary Arragngement (CVA) is a legally binding arrangement agreed by the company’s creditors to ensure an agreed payment made to the creditors over a period. Note though, this may only be a percentage of that outstanding.

Contemplate a Company Administration

Company Administration is a strong move for limited companies facing insolvency. However, it has many advantages; it allows the business to reprieve from actions by creditors, while allowing continuity or proposing selling the business.

The process is straightforward. Once you have agreed to appoint an IP, then the company transfers over to the IP upon appointment; therefore, stopping further creditor action.

However, any charge holder must be notified and may appoint their administrator if they wish.

An appointed administrator will draw up proposals to undertake any of the following.

  • To commence, restore company viability
  • Restructure the limited companies business
  • Realise the business as a trading going concern,
  • Realise more money from the assets than in a liquidation
  • Selling company assets so the liquidator may pay preferential and secured creditors.

The administrator will also consider whether you can maintain trading.

Propose an Administrative Receivership

It is used when a floating charge is over the company, usually by a financial institution like the company bankers. Here, the floating charge holder appoints an Administrative Receiver.

Financial institutions holding a floating charge appoint a licensed insolvency practitioner as the receiver to recover money owed protected by the charge. However, courts are not usually involved as the charge is registered at the company house as a legally binding document. Monies owed are conditional on the charge and how recovered if defaulted.

Please Note: The appointed receiver will recover:

  • The costs associated with the receivership by them;
  • Pay any preferential creditors;
  • Repay the floating charge holder’s debt.

This option allows nothing for creditors of your company who are unsecured. However, its use is not allowed if the floating charge registration date happened after September 2003. 

Voluntary Liquidate or ‘wind up’ my Limited Company?

Liquidation, or ‘winding up’ a company, means closing it down. The company assets realised, and then funds paid out to creditors in order of preference. However, this may not cover the money owed to all creditors.

This applies to both insolvent and solvent companies. If your company remains solvent, then this type of liquidation is referred to as a ‘member’s voluntary liquidation’; if insolvent, then a ‘creditor voluntary liquidation’ (CVL) or a ‘compulsory liquidation’ remains proposed.

In all liquidation cases, the appointed liquidator remains required to investigate the director’s conduct up to their appointment. They then send a confidential report to the insolvency service for consideration of any further action.

What if the companies creditors commence legal action against my Insolvent Company?

Creditors of the company chasing overdue debt may use various ways to recover outstanding money.

Methods used include:

  • Applying to a court for judgement and bailiff action;
  • Issuing a statutory demand;
  • If the first two options fail, then a company creditor may proceed to apply for the courts to wind the company up in the courts.

However, directors may avoid such action by paying the debt or those options detailed above, like an administration. Directors may stop creditors applying to wind up their company legally through a corporate solicitor’s help through the courts.

If the options fail, company creditors may proceed to attempt to issue a winding-up order, therefore:

  • Your companies bank freezing the bank accounts of the company;
  • The courts appoint the official receiver to realise the assets of the company to enable payment to creditors;
  • All company employees, including directors, are made redundant unless a sale can be brokered of the business as a going concern.

What Is Business Insolvency in the UK & Exposure As A Director?

It is essential to note. A limited company in England and Wales is a separate legal entity to its directors. However, often in the insolvency of a company, directors may be impacted through signing personal guarantees. They further may be affected through wrongful or fraudulent trading.

For further support & advice, please contact a member of our team at HBG Advisory.

Possible outcomes of such issues may be:

  • Exposure to personal liability for the debts owed by your company;
  • Receiving a Director disqualification (up to 15 years);
  • Being issued with a fine;
  • A possible prison sentence.


It is essential you act quickly for your professional and personal life if you think your business is insolvent. Please ensure you seek professional advice and understand clearly your available options. Only then may you plan your way forward with an insolvent limited company.

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