Time is critical. Directors who continue trading when they knew or should have known the company could not avoid insolvent liquidation may face personal liability for wrongful trading. Early action protects you, your creditors, and your employees.
1. Recognise the warning signs of insolvency
A company is insolvent if it cannot pay debts as they fall due (cash flow test) or its liabilities exceed its assets (balance sheet test). You must monitor both tests continually - insolvency can occur even when the company is profitable.
Section 123 defines when a company is deemed unable to pay its debts - the trigger for compulsory winding up and the standard for determining insolvency across all procedures.
Statutory demand threshold
£750 minimum debt
Response period
3 weeks after statutory demand served
Cash flow test (s.123(1)(e))
Unable to pay debts as they fall due
Balance sheet test (s.123(2))
Liabilities exceed assets (including contingent and prospective)
Statutory demand route (s.123(1)(a)) Company deemed unable to pay debts if:
Creditor owed more than £750 serves written demand Company fails to pay within 3 weeks OR fails to secure or compound the debt to creditor's reasonable satisfaction Other grounds Execution or process returned unsatisfied (s.123(1)(b)) In Scotland, charge for payment not satisfied (s.123(1)(c)) Court satisfied company unable to pay debts as they fall due (s.123(1)(e)) Court satisfied liabilities exceed assets - balance sheet test (s.123(2)) Key principle: Either test can establish insolvency. Cash flow test focuses on liquidity; balance sheet test focuses on solvency.
2. Understand your duties when insolvency threatens
When insolvency becomes likely, your duty shifts from shareholders to creditors. You must minimise losses to creditors - this overrides normal commercial considerations. Every decision should be documented.
When a company becomes insolvent, directors' duties shift from promoting success for shareholders (Companies Act 2006 s.172) to protecting creditors' interests (common law duty established in West Mercia Safetywear Ltd v Dodd [1988]).
Insolvency definition (cash flow test)
Company unable to pay debts as they fall due (Insolvency Act 1986 s.123(1)(e))
Insolvency definition (balance sheet test)
Liabilities exceed assets, taking into account contingent and prospective liabilities (s.123(2))
Duty shift
From shareholders' benefit to creditors' interests
5 key responsibilities when insolvent Protect company assets - Prevent asset dissipation, avoid preferential payments to some creditors, don't dispose of assets below valueTreat all creditors equally - Cannot prioritise one unsecured creditor over another (unless legal priority), avoid "preferences" (paying friendly creditor ahead of others)Prevent deterioration - Don't incur new debts company cannot pay, avoid increasing creditor losses, consider whether continuing to trade worsens positionSeek professional advice - Consult licensed insolvency practitioner, consider all rescue and insolvency options, document decisions and advice receivedMaintain proper records - Keep accounting records up to date, preserve books and records, file statutory returns at Companies HousePersonal liability exceptions Directors generally NOT personally liable (company is separate legal entity, "limited liability" principle protects directors and shareholders).
Exceptions - personal liability CAN arise:
Wrongful trading (s.214 Insolvency Act 1986) Fraudulent trading (s.213 Insolvency Act 1986) Misfeasance (breach of duty) Compensation orders (court-ordered for misconduct) Personal guarantees (if directors have given guarantees for company debts) Fraudulent preference (preferring connected parties) Transactions at undervalue (selling assets below value to defeat creditors)
Director disqualification period
2 to 15 years (if Secretary of State applies for disqualification order)
Investigation period
Last 3 years of directors' tenure
Director duties upon insolvency - GOV.UK (opens in a new tab)
Document everything. Keep detailed records of why you made each decision, what advice you took, and how you considered creditors' interests. This documentation is your evidence if decisions are later questioned by a liquidator.
3. Understand your personal liability risks
Directors face personal liability for wrongful trading (continuing when you should have known insolvency was unavoidable) and fraudulent trading (intent to defraud). The 'every step' defence requires you to prove you took all reasonable steps to minimise creditor losses.
Wrongful trading (Insolvency Act 1986 s.214) is a civil offence allowing liquidators or administrators to make directors personally liable for continuing to trade when they knew or should have known there was no reasonable prospect of avoiding insolvent liquidation/administration.
Legal basis
Insolvency Act 1986, s.214 (liquidation) and s.246ZB (administration)
Status
Civil offence (not criminal)
Applicant
Liquidator or administrator
Target
Directors (including shadow directors)
Standard of proof
Balance of probabilities (civil standard)
Three conditions for wrongful trading (s.214(2)) Insolvent liquidation/administration has occurred - Company gone into insolvent liquidation, OR entered insolvent administration (assets insufficient for debts + administration expenses)Director knew or ought to have concluded - At some point before insolvency procedure, that there was no reasonable prospect company would avoid insolvent liquidation/administrationPerson was a director at that time - Includes shadow directors (s.214(7))Standard of care (s.214(4)) - dual standard, whichever is HIGHER Objective standard: General knowledge, skill and experience reasonably expected of person carrying out same functions as that director.
Subjective standard: The actual knowledge, skill and experience of that particular director.
Effect: Experienced, qualified directors held to higher standard. Cannot claim ignorance if they had expertise in relevant area. Non-executive directors still subject to objective standard.
Defence against wrongful trading (s.214(3)) Director escapes liability if they prove: From the moment they knew/should have known insolvency inevitable, they took "every step with a view to minimising the potential loss to the company's creditors" as they ought to have taken.
What constitutes "every step":
Seek professional advice from insolvency practitioner Call board meeting to assess position Prepare up-to-date financial position Consider all rescue options (CVA, administration, moratorium) If no rescue possible: cease trading, place into liquidation/administration DO NOT continue trading if worsening positionDO NOT incur further creditDO NOT dispose of assets improperly
Court powers
Declare director liable to make contribution to company's assets of such amount as court thinks proper
Typical awards
£10,000 to £500,000+ (depending on losses incurred by continued trading)
Discretionary factors
Extent of losses caused, director's culpability, whether director acted honestly
Scope of "trading": Broad interpretation - no requirement to prove company actually traded. Activities short of trading can trigger liability (selling assets with view to winding up, failing to collect debts owed, any conduct affecting creditor position).
Fraudulent trading and criminal liability
Fraudulent trading is a criminal offence requiring intent to defraud creditors. Unlike wrongful trading, it has no minimum amount and carries unlimited personal liability plus potential imprisonment.
Fraudulent trading (Insolvency Act 1986 s.213) is a serious offence where business is carried on with intent to defraud creditors. Unlike wrongful trading, it requires proof of dishonest intent and carries criminal penalties.
Legal basis
Insolvency Act 1986, s.213 (civil), Companies Act 2006 s.993 (criminal)
Status
Both civil AND criminal offence
Mental element required
Intent to defraud (actual dishonesty must be proved)
Who is liable
Any person knowingly party to fraudulent trading (not limited to directors)
Criminal penalty (CA 2006 s.993)
Up to 10 years imprisonment and/or unlimited fine
Civil remedy (IA 1986 s.213)
Personal contribution to company assets as court thinks proper
Elements of fraudulent trading The liquidator must prove:
Business of the company was carried on with intent to defraud creditors of the company OR intent to defraud creditors of any other person OR for any fraudulent purpose Key features:
Actual dishonesty required (not merely negligence) Intent to defraud must be proved to criminal standard for s.993 prosecution Civil standard (balance of probabilities) for s.213 contribution order No defence available once intent proven Distinction from wrongful trading (s.214) Feature Fraudulent (s.213) Wrongful (s.214) Mental element Intent to defraud (dishonesty) Knew or ought to have known Who liable Anyone knowingly party Directors/shadow directors only Criminal liability Yes (up to 10 years) No Defence available No Yes ("every step" defence) Standard of proof Criminal for s.993 Civil only
Finding an insolvency practitioner
Only licensed insolvency practitioners can act in formal insolvency procedures. Check the Insolvency Service register to verify practitioners are licensed. Fees are regulated but vary - get quotes from several practitioners.
Only licensed insolvency practitioners (IPs) authorised by Recognised Professional Bodies (RPBs) can act in formal insolvency procedures.
Insolvency Service regulation levy
£610 per authorised IP (increased from £470, effective 1 January 2025) — charged to each RPB and typically passed on through the RPB's own licence fees, which vary by body
Recognised Professional Bodies
ICAEW, ICAS and the Insolvency Practitioners Association (IPA). Chartered Accountants Ireland ceased authorising IPs from 1 January 2025 and ACCA from the end of 2019
Qualification route
Pass Joint Insolvency Examination (JIE), obtain 2-3 years practical experience, secure bond/insurance, apply to RPB for licence, maintain CPD
Fee charging methods (3 options) 1. Time-cost basis: Hourly rates for IP and staff. Must provide estimate of time expected. Most transparent method. Common in administrations and complex liquidations.
2. Percentage basis: Percentage of assets realised (typically 8-15%) or percentage of distributions made. Common in CVAs (10-15% of funds distributed). Incentivises asset recovery.
3. Fixed fee: Agreed lump sum. Provides certainty to creditors. Common in straightforward MVLs and CVLs. Risk on IP if case more complex than anticipated.
Hybrid: IPs can use combination (e.g. fixed fee + time costs for unforeseen work).
Partners/appointment-takers (hourly rate)
£375 - £650
Managers/senior insolvency professionals (hourly rate)
£200 - £350
Administrators/assistants (hourly rate)
£120 - £175
Geographic variation
London rates typically 20-30% higher than regional
18-month fee fixing rule
IP should fix basis of fees within 18 months of appointment. If not, fees default to Insolvency Service scale rates (often less favourable to IP)
Official Receiver fees (compulsory liquidations) Official Receiver is civil servant from Insolvency Service, appointed automatically by court in compulsory liquidations.
Official Receiver general fee (fixed)
£7,200 (from 9 January 2025, applies to every compulsory liquidation case)
Secretary of State fee on realisations
Flat 15% of gross value of assets realised by Official Receiver
Payment timing
Not paid upfront - recovered from asset realisations (if any)
Fee approval and creditor rights Who approves fees: Creditors (by decision procedure), liquidation committee (if established), or court (if creditors cannot agree, or on application).
Information requests (rule 18.9): Creditors with at least 5% in value of claims, OR any secured creditor, OR any creditor with court permission, can request further information about fees and expenses. Request must be made within 21 days of receiving the IP's report.
IP must provide: Detailed breakdown of fees and expenses, time records (if time-cost basis), explanation of why fees are at proposed level, comparison with initial estimate.
Court challenge (rule 18.34): A secured creditor, or unsecured creditors of at least 10% in value (or any creditor with court permission), can apply to court to challenge the basis or amount of the IP's remuneration within 8 weeks of the report. Court can confirm, reduce, order refund, or make costs orders.
Statement of Insolvency Practice 9 (SIP 9) specifically governs fee charging. RPBs monitor compliance. Regular compliance inspections. Disciplinary procedures for breaches.
Comprehensive guide covering CVA, administration, pre-pack administration, MVL, CVL, and compulsory liquidation. Compare options based on your circumstances.
Rescue option: Company Voluntary Arrangement (CVA)
A CVA lets you restructure debts while continuing to trade. You propose a repayment plan to creditors - if 75%+ by value approve, it binds all unsecured creditors. The company stays under your control with an insolvency practitioner supervising.
A Company Voluntary Arrangement (CVA) is an insolvency procedure allowing limited companies to pay creditors over a fixed period while continuing operations, provided creditors consent. Governed by Insolvency Act 1986, Part I.
Creditor approval threshold
75% approval (by debt value) of creditors who vote
Anti-abuse protection
Proposal fails if more than 50% of unconnected creditors (by value) vote against it
Creditor notice period
At least 14 days' notice of meeting or decision procedure
Proposal creation timeline
Within 28 days of insolvency practitioner appointment
Challenge window
28 days from the required reports being made to court (grounds - unfair prejudice or material irregularity)
Typical duration
1-5 years
Setup costs (small/simple CVAs)
£1,500 - £5,000
Typical setup range
£2,500 - £5,000
Ongoing supervisor fees
10-15% of funds distributed to creditors (or time-cost or fixed fee basis)
Who can use CVA: Limited companies and Limited Liability Partnerships (LLPs). Not available to sole traders (must use Individual Voluntary Arrangement) or companies already in liquidation.
Key characteristics: Debtor-in-possession process (directors remain in control), minimal court involvement, supervised by licensed insolvency practitioner, binding on all unsecured creditors once approved.
Company Voluntary Arrangements - GOV.UK (opens in a new tab)
Rescue option: Administration
Administration provides breathing space from creditors through a statutory moratorium. An administrator takes control to rescue the company as a going concern, achieve a better result than liquidation, or realise assets for secured creditors. Pre-pack administration arranges a sale before appointment.
Administration is a court-supervised insolvency procedure where a licensed insolvency practitioner (administrator) takes control of the company to achieve rescue or better outcomes for creditors than immediate liquidation. Governed by Insolvency Act 1986, Schedule B1.
Initial duration
1 year from appointment (extendable by creditor consent or court order)
Extension by creditor consent
Up to 6 months (can repeat)
Extension by court order
Any period court thinks fit
Administrator proposals deadline
Within 8 weeks of appointment
Creditor consideration period
Minimum 5 business days to respond to proposals
Progress reports frequency
Every 6 months during administration
Director conduct reporting period
Last 3 years of trading
Routes into administration Route 1 - Court order: Application by company, directors, creditors, or qualifying floating charge holder. Interim moratorium applies from application filing until order granted or dismissed.
Route 2A - Out-of-court by company/directors: File notice of intention (provides 5 business days interim moratorium), notify qualifying floating charge holders at least 5 business days before appointment, appoint by filing notice.
Route 2B - Out-of-court by qualifying floating charge holder: Give at least 2 business days' notice to prior-ranking charge holders, file notice of appointment (effective immediately).
Notice of intention moratorium
5 business days interim protection
Notice to charge holders
Minimum 5 business days before appointment
Statutory moratorium protections
No winding-up petition, no enforcement of security, no legal process against company without administrator consent or court permission
Statutory purposes (priority order) Primary: Rescue the company as a going concernSecondary: Achieve better result for creditors than immediate winding upTertiary: Realise property to make distribution to secured or preferential creditorsAdministrator fees: Typically charged on time-cost basis (hourly rates £120-£650 by seniority), OR percentage of assets realised (8-15%), OR fixed fee. Must be approved by creditors or court.
Creditors' Voluntary Liquidation (CVL)
Directors can place the company into CVL by passing a resolution and appointing a liquidator. This is often the best option when rescue has failed - it's seen as acting responsibly and gives directors more control over the process than compulsory liquidation.
Creditors' Voluntary Liquidation (CVL) is used when a company cannot pay debts and directors recognise insolvency, acting proactively. Preferable to waiting for compulsory liquidation.
Insolvency definition (cash flow test)
Unable to pay debts when they fall due
Insolvency definition (balance sheet test)
Liabilities exceed assets (taking into account contingent and prospective liabilities)
Shareholder notice period
14 days clear notice (can be reduced to immediate if 90% consent to short notice)
Shareholder resolution required
75% approval (special resolution) to wind up company
Creditor notice period
7 clear days minimum
Companies House filing deadline
Within 15 days of shareholder resolution
Gazette advertisement deadline
Within 14 days
Fastest possible timeline
8 days (with shareholder/creditor consent to short notice)
Typical timeline
2+ weeks
Dissolution timing
3 months after final account filed
Creditor decision methods: Deemed consent (creditors notified, no meeting unless requested), virtual meeting (if creditors request), or correspondence (qualifying decision procedure).
Creditor powers: Approve or replace liquidator nominated by shareholders, form liquidation committee, approve liquidator's fees.
Insolvency practitioner fees (time-cost basis)
Hourly rates £120-£650 depending on seniority
Insolvency practitioner fees (percentage basis)
8-15% of assets realised
Insolvency practitioner fees (fixed fee, small companies)
Typically £3,000-£10,000
Typical total cost (simple cases)
£4,000 - £12,000
Complex cases
Up to £25,000+
Liquidator's duties Investigate company affairs and directors' conduct Realise assets - sell property, collect debts Pay creditors in statutory order of priority Report on director conduct to Insolvency Service (for last 3 years of directors) Distribute surplus to shareholders (if any - rare in CVL) File final account with Registrar and creditors Dissolution (3 months after final account) Creditors' Voluntary Liquidation - GOV.UK (opens in a new tab)
Compulsory liquidation
A creditor owed more than 750 pounds can petition the court for compulsory liquidation. The Official Receiver becomes liquidator initially. This is generally worse for directors - you lose all control and face more scrutiny.
Compulsory liquidation is initiated when a creditor (or other eligible party) petitions court to wind up a company. Most commonly used when company is unable to pay debts.
Minimum debt (statutory demand)
£750
Statutory demand payment deadline
21 days
Petition filing earliest date
21 days after statutory demand served (if used)
Petition fee
£302 - £343
Official Receiver deposit
£2,600
Total court fees
£2,902 - £2,943
Deposit refund if petition withdrawn/dismissed
£2,550 refunded (£50 retained)
Service deadline
At least 7 days before hearing
Gazette advertisement timing
Not less than 7 business days after service AND not less than 7 business days before hearing
Gazette advertisement cost
£100 - £200
Hearing listing
Typically 6-10 weeks after petition filed
Statutory demand route: Creditor serves statutory demand for debt over £750. Company fails to pay or reach settlement within 21 days. Creditor can then present winding-up petition.
Court venue: High Court (if registered office in London or debt over £50,000). County Court (if registered office outside London and debt under £50,000).
Validation order fee
£155 (to access frozen bank accounts)
Hearing fee (if required)
£280
Solicitor fees (petition preparation)
£525 - £2,500
Solicitor fees (hearing attendance)
£200 - £1,000
Total legal costs
£725 - £3,500
Process server costs
£100 - £200
Total cost to petitioner
£4,500 - £7,000+ (depending on complexity)
Effect of winding-up order Immediate consequences: Official Receiver appointed as liquidator (initially), company bank accounts frozen, directors lose all powers immediately, employees dismissed (can claim redundancy from National Insurance Fund if company has no assets), company property vests in liquidator.
Liquidate your limited company - GOV.UK (opens in a new tab)
Who gets paid first when assets are distributed. Know where different creditors rank so you can explain the position to those pressing for payment.
Distribution waterfall
Assets are distributed in strict priority: fixed charge holders, insolvency costs, preferential creditors (employees), prescribed part for unsecured creditors, floating charge holders, unsecured creditors, shareholders. Understanding this helps manage creditor expectations.
Pay fixed charge holders
Fixed charge holders paid first from their specific charged assets only.
Deduct costs of realisation
Costs of preserving and selling assets are deducted from proceeds.
Pay expenses of winding up
Liquidator/administrator fees and administration costs.
Pay ordinary preferential debts
Employee wages (up to 4 months, max £800), holiday pay, pension contributions. Rank equally, abate proportionally.
Pay secondary preferential debts
HMRC for VAT, PAYE, employee NI, CIS deductions held in trust (from December 2020).
Set aside prescribed part
50% of first £10,000 + 20% above, max £800,000, from floating charge realisations for unsecured creditors.
Pay floating charge holders
From remaining floating charge realisations after prescribed part.
Pay unsecured creditors
Pro rata from prescribed part and any remaining assets.
Return to shareholders
Any surplus after all creditors paid (rare in insolvent liquidation).
If your company can pay all its debts within 12 months, MVL offers tax-efficient distribution of assets. Not appropriate for companies in financial difficulty.
Strike-off is only appropriate for companies with no debts and minimal assets. If your company has debts it cannot pay, formal insolvency is required - strike-off is not an option.
Your legal obligations for consultation, notice periods, redundancy pay, and notification to the Redundancy Payments Service when closing your business.
Collective consultation requirements
If making 20+ redundancies at one establishment within 90 days, you must consult collectively. Start consultation at least 30 days before first dismissal (45 days for 100+ redundancies). Failure to consult properly triggers protective awards.
Trigger
20 or more redundancies at one establishment within 90 days
20-99 redundancies
Minimum 30 days consultation before first dismissal
100+ redundancies
Minimum 45 days consultation before first dismissal
Consult with
Trade union reps or elected employee representatives
Consultation topics
Ways to avoid redundancies, reduce numbers, mitigate consequences
Meaningful consultation
Must consult in good faith with genuine consideration of alternatives
Penalty for failure
Protective award up to 180 days' pay per affected employee
Collective redundancy consultation (opens in a new tab)
Transactions that can be challenged
Liquidators can challenge transactions made before insolvency. Preferences (paying one creditor over others) can be challenged if made within 6 months (2 years for connected parties). Transactions at undervalue within 2 years can be set aside.
Liquidators and administrators can challenge certain transactions made before insolvency. The "relevant time" varies by transaction type and whether connected persons were involved.
Transactions at undervalue
2 years before onset of insolvency
Preferences (connected persons)
2 years before onset of insolvency
Preferences (unconnected persons)
6 months before onset of insolvency
Transactions defrauding creditors (s.423)
No time limit
Extortionate credit transactions
3 years before administration/liquidation
Transaction at undervalue (s.238) Company:
Made a gift or received no consideration, OR Received consideration of significantly less value than provided Defence: Company acted in good faith, for purpose of carrying on business, with reasonable grounds to believe transaction would benefit company.
Preferences (s.239) Company did anything putting a creditor in better position than in liquidation. Must prove company was "influenced by desire to prefer" (presumed for connected persons).
Connected persons Directors and shadow directors Associates of directors (family, business partners) Companies under common control
Avoid preferential payments. Paying family members, friends, or directors' loan accounts ahead of other creditors can be set aside and may indicate fraudulent intent. Treat all creditors fairly unless there are legitimate commercial reasons for payment.