When your business faces financial pressure, it can be hard to know what to do next. The word “insolvent” often sounds final, but it doesn’t always mean the end of the road. Instead, insolvency signals a moment to step back, reassess, and take informed, strategic action.
In this guide, we walk through what happens when a company becomes insolvent, outlining each step in the process and the options available to directors.
Step 1: Recognise the Signs of Insolvency
Insolvency usually doesn’t happen overnight. It often builds over time, with cash flow issues and mounting debts gradually becoming unmanageable.
You might be struggling to pay suppliers on time or missing deadlines for HMRC payments. Perhaps wages are getting harder to meet, or there’s growing pressure from creditors. If your liabilities outweigh your assets or you’re regularly borrowing just to stay afloat, your business may be insolvent.
Statistics show that 20% of small businesses fail in their first year, and around 60% fail within the first three years. The earlier you identify a potential insolvency issue, the more options you’ll have to respond effectively.
Step 2: Stop Trading (If Needed)
When a company is insolvent, directors must prioritise the interests of creditors. Continuing to trade while insolvent could lead to accusations of wrongful trading, which may result in personal liability.
In many cases, stopping trade is the most responsible move. If the business cannot pay its debts, increasing them through further trading only worsens the position. This doesn’t mean everything stops immediately, but directors should avoid making any decisions that could negatively affect creditors. It’s essential to seek advice at this point.
Step 3: Seek Professional Advice
This is a critical stage. Directors are expected to take swift, responsible action once insolvency is suspected. The best way to do this is to speak with a licensed insolvency practitioner who can assess the company’s financial position and explain the available options.
At Clarke Bell, we offer a free consultation for directors in this situation. Our team will look at the business in detail and advise on the most suitable next steps, whether that means closure or restructuring.
Step 4: Consider Your Options
When a business is insolvent, several possible solutions exist. A Creditors’ Voluntary Liquidation (CVL) is a formal process to close the company, during which a licensed insolvency practitioner takes control, sells off assets, and distributes the proceeds to creditors.
Another option is a Company Voluntary Arrangement (CVA). This allows the company to reach an agreement with its creditors to repay debts over time while continuing to trade. If the company has a viable future, this can be a useful way to protect jobs and reputation.
Administration is a more protective option, placing the company under the control of an administrator. This helps protect it from legal action while a rescue or sale plan is considered. In some cases, a pre-pack administration is arranged, where the company’s assets are sold immediately, often to a new business run by the same directors.
Every case is different, and the right path depends on the company’s financial structure, business model, and creditor relationships.
Step 5: Notify Creditors and Staff
Once an insolvency process begins, certain legal steps must be taken. Creditors need to be informed about the company’s situation and the steps being taken. This is handled by the insolvency practitioner, who ensures communication is clear and in line with legal requirements.
Employees are also affected. If they are made redundant, they may be entitled to claim unpaid wages, redundancy pay, and other entitlements from the government’s Redundancy Payments Service. Directors should be prepared for this impact on their team and ensure employees are supported during the transition.
Step 6: Appoint a Liquidator or Administrator
Once a course of action is agreed upon, a licensed insolvency practitioner is appointed to carry it out. In a CVL, this person becomes the liquidator and is responsible for realising company assets, distributing proceeds to creditors, and overseeing the final closure.
In administration, the practitioner becomes the administrator and works to restructure or sell the business in the best interests of creditors. In a CVA, the practitioner acts as the nominee and supervisor of the arrangement, ensuring it is followed correctly over the agreed term.
From this point forward, the insolvency practitioner manages the process and ensures all legal obligations are met.
Step 7: Closure or Recovery
The outcome depends on the route taken. In a CVL, once all assets are dealt with and debts have been addressed as far as possible, the company is dissolved and removed from the Companies House register. If a CVA is completed successfully, the company can return to normal trading and move forward with a stronger foundation.
If the company entered administration, it may have been sold to new owners, restructured, or closed, depending on what was deemed best for creditors. In any case, the insolvency process creates a formal and legally compliant conclusion.
Making Informed Decisions in Difficult Times
Insolvency can feel like a daunting challenge. However, with the right support, it becomes a structured process that helps directors deal with financial difficulties professionally and responsibly.
If your company is facing financial issues, the best thing you can do is act early. Seek advice, understand your obligations, and take the first step toward a resolution.
