A company is insolvent if it cannot pay its debts when they fall due, or if what it owes is more than what it owns. At that point you have a choice of formal procedures. Some aim to rescue the company or its business; others close it and share out what is left among its creditors. Each needs a licensed insolvency practitioner, and the earlier you take advice, the more of these options stay open.
If your company can pay all its debts and you want to close it, use a members' voluntary liquidation instead.
Get breathing space with a moratorium
An eligible company can apply for a moratorium, which gives it an initial 20 business days' protection from creditors while it works out a rescue. The directors must state that the company is, or is likely to become, unable to pay its debts, and an insolvency practitioner must agree to act as monitor.
Pay creditors over time with a company voluntary arrangement
A company voluntary arrangement (CVA) lets a limited company or limited liability partnership pay its creditors over a fixed period while it keeps trading. The directors or members must agree to apply, and you can only get a CVA through an insolvency practitioner, who charges to set it up and to run it.
- The insolvency practitioner works out how much the company can pay and a payment schedule, reports to the court within 28 days of being given notice of the proposal, and invites creditors to vote.
- The CVA is approved if creditors holding 75% by value of the debts of those who vote agree.
- The company then makes the scheduled payments through the insolvency practitioner. If it misses them, any creditor can apply to wind the company up.
Hand control to an administrator
In administration, an insolvency practitioner takes control of the company and everything it owns. While the company is in administration, creditors cannot take legal action against it and nobody can apply to wind it up.
- The administrator must aim first to rescue the company as a going concern; if that is not reasonably practicable, to get a better result for creditors as a whole than a winding up; and failing that, to realise property to pay secured or preferential creditors.
- Within 8 weeks the administrator sends creditors, employees and Companies House a statement of proposals. The options include agreeing a CVA, selling the business as a going concern, moving to a creditors' voluntary liquidation, or closing the company.
- The administrator runs the business and can cancel or renegotiate contracts and make employees redundant. The company pays the administrator's fees.
- Administration ends automatically after a year unless it is extended, by the court or, for up to a year, with creditors' consent.
Close the company through a creditors' voluntary liquidation
If the company cannot be rescued, the directors can propose that it stops trading and is wound up. Shareholders holding 75% by value of the shares must pass a winding-up resolution. Then you must:
- appoint an authorised insolvency practitioner as liquidator;
- send the resolution to Companies House within 15 days; and
- advertise it in The Gazette within 14 days.
Your responsibilities as a director change once the liquidator is appointed.
Compulsory liquidation by the court
A creditor whose statutory demand the company has not met can petition the court to wind the company up. Directors can also petition, if the company cannot pay its debts and 75% of shareholders by value agree. If the court makes a winding-up order, it puts the official receiver in charge of the liquidation.
How to choose
A CVA suits a company whose business is sound but whose debts are too heavy, if creditors are likely to accept being paid over time and the company can keep up the payments. Administration suits a company that needs protection from creditors while the business is restructured or sold. A creditors' voluntary liquidation suits a company with no realistic prospect of rescue, and lets the directors start the process rather than wait for a creditor's petition.
Company rescue and insolvency procedures
What each procedure does and who controls the company during it.
| Procedure | What it is for | Who runs the company | Does the company survive? |
|---|---|---|---|
| Moratorium | Short breathing space to plan a rescue | The directors, with an insolvency practitioner as monitor | It can, if a rescue follows |
| Company voluntary arrangement | Paying creditors over a fixed period | The company keeps trading under the agreed arrangement | Yes, if it keeps to the payments |
| Administration | Rescue, or a better result for creditors than winding up | The administrator | Sometimes; the business may be sold or the company wound up |
| Creditors' voluntary liquidation | Closing an insolvent company on the directors' proposal | The liquidator | No |
| Compulsory liquidation | Closing a company by court order | The official receiver at first | No |
Who gets paid in a liquidation
Legal basis
Primary legislation and key regulations
Browse UK legislation (opens in a new tab) legislation.gov.uk