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What triggers insolvency
A company is legally insolvent if it cannot pay its debts as they fall due (cash-flow insolvency) or if its total liabilities exceed its total assets (balance-sheet insolvency). Either test, if met, opens the door to formal insolvency proceedings. A statutory demand unpaid for 21 days, or an unsatisfied court judgment, can also be used by a creditor to present a winding-up petition.
The main formal procedures
UK law offers several procedures, each suited to different circumstances:
- Administration: A licensed insolvency practitioner takes control with the aim of rescuing the company or achieving a better outcome for creditors than immediate liquidation. A moratorium on creditor action applies during administration.
- Company Voluntary Arrangement (CVA): A binding agreement between the company and its creditors to pay debts over time, allowing the business to continue trading.
- Creditors' Voluntary Liquidation (CVL): Directors resolve to wind up the company and appoint a liquidator; used when rescue is not viable.
- Compulsory liquidation: A court-ordered winding-up, typically on a creditor's petition.
Director responsibilities at the point of insolvency
Once a company is insolvent or approaching insolvency, the interests of creditors take priority over those of shareholders. Directors must avoid transactions that prefer certain creditors over others (preferences) or dispose of assets at undervalue — both can be challenged by a liquidator. Early advice from a licensed insolvency practitioner is strongly recommended.
The specific duties and risks vary by procedure and timing; confirm your obligations with a qualified insolvency practitioner or solicitor.
Frequently asked questions
What is the difference between administration and liquidation?
Administration aims to rescue or restructure the business where possible; liquidation terminates the company and distributes its assets to creditors. Administration often precedes a pre-pack or business sale; liquidation is the end point.
Can directors be personally liable for company debts on insolvency?
Yes, in certain circumstances. Wrongful trading, fraudulent trading, and misfeasance can all lead to personal liability. Directors who took proper steps when they first knew or should have known the company could not avoid insolvent liquidation have a stronger defence.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.