Understanding limited company insolvency

If your business is in financial trouble or heading towards it, seek advice from a licensed insolvency practitioner right away. Get free, private advice to explore all available options for your company.


What is company insolvency?

Insolvency happens when a company can’t pay its debts or bills on time and in full. It’s like business bankruptcy. A company becomes insolvent when its debts are more than its assets or when it can’t meet its expenses on time.

Being insolvent is risky for a company, but it doesn’t mean it’s hopeless. There are ways to rescue and recover the business, turning its financial situation around. On the other hand, if the company is too far gone, closing it might be the only option.


The meaning of insolvency for your company

If your company shows the signs mentioned above, it might be heading towards insolvency. Once insolvent, your business is vulnerable to a winding-up petition, possibly leading to court-ordered liquidation.

Insolvency doesn’t have to mean the end, but you must act quickly. Seeking professional help improves the chances of a turnaround. Without intervention, the situation may worsen, making recovery harder. Continuing to trade while aware of insolvency risks not only the company but also to your own position.


How do you understand if your company is insolvent?

If you’re unsure about your company’s solvency, two key tests can help you determine its status:

1. Cash flow test – This evaluates your company’s ability to meet upcoming expenses on time and in full. If you can’t, it’s a clear sign of insolvency.

2. Balance sheet test – This looks at all your company’s assets (like property, machinery, and stock) and compares them to current and future debts. If debts outweigh assets, the company is technically insolvent.

Apart from the formal insolvency tests, watch out for these signs indicating your company’s financial trouble or insolvency risk:

  • Struggling to meet financial obligations, regularly making late or incomplete payments to creditors or HMRC.
  • Facing a County Court Judgment (CCJ) or statutory payment demand from a creditor.
  • Insufficient cash flow to cover basic operating expenses.
  • Continuous pursuit by creditors, such as your bank, HMRC, lenders, or credit card companies.
  • Maximum borrowing from the bank and suppliers is known as ceiling borrowing.
  • Directors going unpaid due to insufficient funds.

What to do if your company is insolvent?

When your company is knowingly insolvent, as a director, you must prioritise creditors over yourself and fellow directors. Avoid activities that worsen their position or increase losses, such as adding more debt or stripping company assets.

Ceasing trading immediately is often necessary to protect creditors. However, in some cases, continuing operations may benefit outstanding creditors, a decision only a licensed insolvency practitioner can make. Seek expert advice before deciding your insolvent company’s future.

Failing this duty may lead to accusations of wrongful or fraudulent trading. Guilty verdicts could result in personal contributions to company debts and disqualification from acting as a director in the UK for up to 15 years.


Do you require an insolvency practitioner if your company is insolvent?

A licensed insolvency practitioner is a qualified professional authorised to advise and act for limited companies and their directors. If your company is insolvent, seeking their advice is crucial.

Consulting with an insolvency practitioner helps explore options and determine the best course for your company. It not only increases your chances of a turnaround but also demonstrates your commitment to prioritising creditors and fulfilling your duties as a director.

Whether implementing a turnaround or opting for liquidation, your appointed insolvency practitioner manages the entire process. They handle creditor communication and work on establishing necessary payment plans or agreements. Entering a formal insolvency process requires their involvement, so seeking their help early on is advisable.

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Options for an insolvent company

Several strategies can assist an insolvent company, with the most suitable option depending on factors like the company’s distress level, future viability, and directors’ commitment to a turnaround.

1. Administration – When a company enters administration, it receives a moratorium, pausing legal actions by creditors. This can offer a chance to rescue the business from liquidation, allowing it to continue as a going concern. Administration isn’t a permanent fix; the company will eventually exit the process. However, it provides the time and space to formulate a future plan.

Post-administration, the company might be sold to a connected or unconnected buyer, undergo restructuring and continue under current owners, or enter an alternative process like a CVA or liquidation.


2. Company Voluntary Arrangement (CVA) – If you have numerous creditors, high debt levels, and strained relations, informal negotiations might not suffice. In such cases, a Company Voluntary Arrangement (CVA) could be the answer. It’s a formal payment plan that an indebted company enters into with its creditors, aiming to reduce monthly repayments through an agreed-upon plan. Approval by at least 75% (by value) of creditors makes the CVA legally binding on all parties involved.

3. Liquidation – If the company is beyond rescue, opting for liquidation may be the best choice. Directors can initiate the liquidation of an insolvent company through a process called Creditors’ Voluntary Liquidation (CVL). During this, the appointed insolvency practitioner identifies and values all company assets, selling them to distribute proceeds to creditors. Subsequently, the company is removed from the Companies House register, ceasing to exist legally. Any remaining debt is written off unless personally guaranteed by the directors.

4. Informal Creditors Arrangement or Time to Pay (TTP) – Before opting for a formal process, consider negotiating with creditors for a manageable repayment term on outstanding debts. This approach may lead to lower monthly payments, keeping creditors content and avoiding legal actions against your company. If your main liabilities are with HMRC, explore the option of a Time to Pay (TTP) arrangement. As the name suggests, it provides extra time to bring your account with HMRC up to date.

5. Refinancing Options – If your company faces cash flow issues or requires a boost, exploring commercial finance could be the answer. Valuable assets can be used as leverage for secured financing. Companies with outstanding invoice payments might consider invoice factoring or discounting. Only opt for funding if confident in your company’s ability to repay. Consult an insolvency practitioner for advice on potentially more suitable alternatives.


If your company is insolvent, immediate action is crucial. Ignoring the issues won’t solve them; they’ll only worsen, increasing the risk of wrongful trading allegations. Contact the experts at Vanguard Insolvency now on 0121769 1915 for immediate assistance and advice. Arrange a free, no-obligation consultation with a licensed insolvency practitioner.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.