The Insolvency Process

A company is insolvent when it can’t pay its debts. This could mean either:

  • it can’t pay bills when they become due
  • it has more liabilities than assets on its balance sheet

A company that is insolvent is in danger of being closed down. However, company directors may be able to take action that allows the company to continue trading.

If your company has financial problems, even if you think they might be temporary, you should ensure you understand the options in this guide, and their consequences.

You should also consider getting professional advice from a:

  • Citizens Advice Bureau
  • solicitor
  • qualified accountant
  • authorised insolvency practitioner
  • reputable financial adviser
  • debt advice centre

Ways to deal with your company’s insolvency

‘Insolvency’ describes both the situation an insolvent company is in, and also the various legal procedures for dealing with this situation under the Insolvency Act 1986.

There are 3 options that allow an insolvent company to continue trading. Directors can:

  1. contact all your creditors to see if you can reach an informal agreement
  2. enter into a company voluntary arrangement
  3. put the company into administration, offering some respite from creditor action and enabling:
    • the company to continue
    • property to be sold

You also have the option of liquidating (‘winding up’) your company. This means the company is closed down and its assets are sold and distributed to its creditors.

Creditors can take action to recover the debt by getting a court judgement or issuing a statutory demand (an official request for payment). Once they have done this, you can take certain steps to protect your company from compulsory liquidation(forcing it to close).

If the creditors are unable to recover the debts they are owed through a court judgement or a statutory demand, they can apply to wind the company up (compulsory liquidation).

You can apply to the court to restrain (stop) a winding up order being made. This will allow you to take action yourself (eg by entering into a CVA or administration).

Alternatively, creditors can seek to put your company into administration.

If your company is in financial difficulty you should get advice from a qualified solicitor, accountant, authorised insolvency practitioner or financial adviser. Make sure you are aware of the costs involved before appointing an adviser.

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