If your company can’t pay its debts, acting quickly is important. Whether you’re behind on tax, under pressure from suppliers, or unsure how serious things have become, ignoring the problem can make it worse. The good news is that there are clear steps you can take.
This article explains your options, how to spot when your company is insolvent, and what to do next. Whether you want to close the company or explore ways to keep it going, understanding your responsibilities and acting early can help protect you and give you more control over the outcome.
Assessing Whether Your Company Is Insolvent
The first step is establishing whether your company is experiencing short-term cashflow problems or is genuinely insolvent. Two key tests will help you make this determination: the cashflow test and the balance sheet test.
The cashflow test considers whether the company can pay its bills when they are due. The balance sheet test determines whether the company’s liabilities exceed its assets. If your business fails either test, it may be considered insolvent.
Warning signs include unpaid tax liabilities, increasing creditor pressure, and legal notices such as statutory demands or County Court Judgments.
Directors have a legal duty to act in the best interests of creditors once insolvency becomes a real possibility. Delaying action could expose you to allegations of wrongful trading.
Opening Dialogue with Your Creditors
If the business is fundamentally sound and the financial difficulties are temporary, speaking with your creditors early may help prevent further deterioration. In many cases, suppliers, lenders, or HMRC may be willing to discuss revised payment arrangements or short-term extensions.
Clear, honest communication can go a long way, particularly if the company has a strong payment history. However, these informal negotiations are only viable if you are confident that the business will be able to recover and meet its obligations in the near future.
Seeking Guidance from a Licensed Insolvency Practitioner
When the situation is unclear or worsening, seeking advice from a licensed insolvency practitioner is crucial. Their role is to review your company’s financial position, help you understand your responsibilities as a director, and explain the formal options available.
Engaging an insolvency practitioner at an early stage can help you protect your position and explore all available avenues. Even if you hope to rescue the business, professional advice ensures that any decisions you make are legally compliant and properly documented.
Using a Creditors’ Voluntary Liquidation to Close the Company
If it becomes apparent that the company cannot pay its debts and has no realistic chance of recovery, a Creditors’ Voluntary Liquidation (CVL) may be the most appropriate course of action. This is a formal process that allows directors to voluntarily close an insolvent company in a controlled and compliant manner.
An insolvency practitioner will be appointed to manage the liquidation. Their responsibilities include selling company assets, distributing funds to creditors, dealing with employee claims, and ensuring the business is properly dissolved.
A CVL helps directors meet their legal obligations and can protect them from the risks of continuing to trade while insolvent.
Exploring Business Restructuring Where Recovery Is Possible
If the company has a viable core business but is burdened by debt or overheads, it may be possible to implement a restructure. This could involve operational changes such as reducing costs, renegotiating supplier terms, or seeking new investment.
This option is most effective when you identify problems early and key stakeholders, including creditors, are willing to support the company’s recovery plan. While restructuring carries risk, it can offer a path forward for companies that are still commercially viable.
Responding Appropriately to Legal Pressure from Creditors
Urgent action is required if your company has already received a statutory demand or winding-up petition. Ignoring such notices can result in compulsory liquidation through the courts, during which directors lose control of the business.
Once a petition is served, restrictions are placed on the company’s ability to deal with its assets. Acting before this stage gives you more control over the outcome and may limit the potential for director investigations.
Understanding the Implications of Wrongful Trading
Directors of insolvent companies must avoid wrongful trading. This occurs when a director continues to trade while knowing, or ought to have known, that there was no reasonable prospect of avoiding insolvency.
If found liable, directors can be held personally responsible for company debts. The best way to protect against this is to seek professional advice, keep detailed records of decisions, and avoid taking on new liabilities without a realistic plan for repayment.
Planning for Future Business Activity After Liquidation
Closing a company does not necessarily prevent you from starting another business in the future. However, there are specific rules around reusing a company name and employing staff from the liquidated company.
Understanding these restrictions is important if you intend to launch a new venture after liquidation. A properly managed process, such as a CVL, helps you draw a clear line under the old company and move forward without unresolved legal or financial issues.
The Sooner You Act, the More Options You Have
If your company can’t pay its debts, the worst approach is to do nothing. Whether the solution lies in informal negotiations, formal liquidation, or a structured business recovery, early and informed action is essential.
By understanding your options and seeking expert advice, you can meet your legal duties, minimise risk, and take control of a difficult situation with clarity and confidence.