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.
How to put creditors' interests first, and the conduct that can lead to personal liability or disqualification, once your company is insolvent.
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 liability, not a criminal offence. It allows 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 liability (not a criminal offence)
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)) The company has gone into insolvent liquidation, or entered insolvent administration (its assets are insufficient to pay its debts, other liabilities and the expenses of the procedure). At some time before the liquidation or administration began, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration. The person was a director at that time. This includes shadow directors (s.214(7)). Standard of care (s.214(4)) - dual standard, whichever is higher The objective standard is the general knowledge, skill and experience reasonably expected of person carrying out same functions as that director.
The subjective standard is the actual knowledge, skill and experience of that particular director.
Experienced, qualified directors are held to a 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.
Steps that can count towards this defence:
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 the position is getting worse Do not take on further credit Do not dispose of assets improperly
Court powers
Declare director liable to make contribution to company's assets of such amount as court thinks proper
Discretionary factors
Extent of losses caused, director's culpability, whether director acted honestly
"Trading" is read broadly - 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) can act as office-holders in formal insolvency procedures. They are authorised by recognised professional bodies (RPBs), which the Insolvency Service oversees. To qualify, you must pass the Joint Insolvency Examination and meet your RPB's training and experience rules, and you must have a bond in place when you act.
Insolvency Service levy
£610 per authorised IP (from £470, 1 January 2025)
Recognised professional bodies
ICAEW, ICAS and the Insolvency Practitioners Association
Former RPBs
ACCA (to 31 December 2019); Chartered Accountants Ireland (to 1 January 2025)
Qualification
Joint Insolvency Examination, plus RPB experience rules and a bond
How IP fees are fixed Under rule 18.16 of the Insolvency (England and Wales) Rules 2016, the basis of an administrator's, liquidator's or trustee's remuneration can be:
a percentage of the property dealt with, or of the assets realised or distributed time properly spent by the office-holder and their staff a set amount The basis can combine these, with different bases for different tasks. Except in a members' voluntary winding up, an office-holder who wants to charge on a time basis must first send creditors a fees estimate and details of expected expenses.
Fee bases
Percentage, time costs, set amount or a mix
Time-cost fees
Fees estimate to creditors first
Basis not fixed in 18 months
Scale fees, or court application
Official Receiver fees (compulsory liquidations) In a winding up by the court, the Official Receiver, a civil servant in the Insolvency Service, becomes liquidator. The fees below are set by the Insolvency Proceedings (Fees) Order 2016 and were increased from 9 January 2025.
Official Receiver general fee
£7,200
Administration fee
£6,000 (£13,500 on a public interest petition)
Liquidator fee
15% of chargeable receipts
Increased from
9 January 2025
Fee approval and creditor rights Creditors fix the basis of remuneration by a decision procedure, or a liquidation or creditors' committee does if there is one. The court fixes it if they do not.
A secured creditor, or an unsecured creditor supported by at least 5% in value of the unsecured creditors, can ask the office-holder for more information about remuneration or expenses in a progress or final report within 21 days of receiving it (rule 18.9). The office-holder must respond within 14 days.
A secured creditor, or an unsecured creditor supported by at least 10% in value of the unsecured creditors, or with the court's permission, can apply to court within 8 weeks of the report on the grounds that remuneration or expenses are excessive or the basis is inappropriate (rule 18.34).
Statements of Insolvency Practice (SIPs) set accepted standards for IPs, and the RPBs and the Insolvency Service monitor IPs against them.
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
Nominee's report to court
Within 28 days of notice of the proposal
Challenge window
28 days from the required reports being made to court (grounds - unfair prejudice or material irregularity)
Who can use a CVA Limited companies and limited liability partnerships (LLPs) can use a CVA. Sole traders use an Individual Voluntary Arrangement instead. A company in administration or liquidation can still use a CVA, but the administrator or liquidator makes the proposal.
How a CVA works The directors stay in control of the company, with little court involvement. A licensed insolvency practitioner supervises the arrangement, and charges for setting up the CVA and for administering it. Once approved, the CVA binds every unsecured creditor who was entitled to vote, including those who voted against it.
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 1 year, once only
Extension by court order
Any period court thinks fit
Administrator proposals deadline
Within 8 weeks of appointment
Notice of creditor decision
At least 14 days before the decision date
Progress reports
Every 6 months, sent within 1 month of each period end
Director conduct report
Covers anyone who was a director in the 3 years before administration
Routes into administration By court order: the company, its directors, a creditor or a qualifying floating charge holder applies to court. An interim moratorium applies from when the application is filed until the order is made or the application is dismissed.
Out of court by the company or its directors: file a notice of intention to appoint, which gives an interim moratorium of up to 10 business days, the period within which the appointment must be made. Give qualifying floating charge holders at least 5 business days' notice, then appoint by filing a notice of appointment.
Out of court by a qualifying floating charge holder: give at least 2 business days' notice to the holders of any prior floating charges, then file a notice of appointment, which takes effect immediately.
Notice of intention moratorium
Up to 10 business days (company or directors route)
Notice to charge holders
Minimum 5 business days before appointment
Statutory moratorium protections
No winding-up, enforcement of security or legal process without administrator consent or court permission
Statutory purposes (priority order) Rescue the company as a going concern. This is the primary purpose. If rescue is not reasonably practicable, achieve a better result for creditors as a whole than an immediate winding up. If neither is reasonably practicable, realise property to make a distribution to secured or preferential creditors. Administrator's fees The administrator's pay can be fixed as a percentage of the property they deal with, by the time they and their staff spend, as a set amount, or as a mix of these. The creditors (or their committee) approve the basis, and before a time-cost basis is fixed the administrator must give creditors a fees estimate and details of expected expenses.
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.
A Creditors' Voluntary Liquidation (CVL) is used when a company cannot pay its debts and the directors decide to wind it up before a creditor petitions the court.
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 clear days, or shorter with consent of holders of 90%
Shareholder resolution required
75% approval (special resolution) to wind up company
Creditors' decision on the liquidator
At least 3 business days after notice; within 14 days of the resolution
Companies House filing deadline
Copy of the resolution within 15 days
Gazette advertisement deadline
Within 14 days of the resolution
Dissolution timing
3 months after the final account is registered
Creditor payment priority
Fixed charge holders, liquidation costs, employees, HMRC, floating charge holders, unsecured creditors
Employee claims
Preferential for up to £800 of wages
Creditors decide on the liquidator by deemed consent (creditors are notified and there is no meeting unless enough of them ask for one) or at a virtual meeting.
Creditors can approve or replace the liquidator nominated by the shareholders, form a liquidation committee and approve the liquidator's fees.
Employees are ordinary preferential creditors for up to £800 of wages owed for the 4 months before the liquidation, plus holiday pay. HMRC is a secondary preferential creditor for VAT and for PAYE, employee National Insurance, CIS and student loan deductions, and is paid after employees but before floating charge holders. Before floating charge holders are paid, the liquidator sets aside a prescribed part of the floating charge assets for unsecured creditors. Employees can claim redundancy pay and some other amounts owed from the Redundancy Payments Service.
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 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)
Over £750
Statutory demand payment deadline
21 days
Petition filing earliest date
21 days after statutory demand served (if used)
Petition fee
£352
Official Receiver deposit
£2,600
Total court fees
£2,952 (£352 fee plus £2,600 deposit)
Gazette advertisement timing
At least 7 business days after service and before the hearing
A creditor owed more than £750 can serve a statutory demand. If the company does not pay or reach a settlement within 21 days, the creditor can present a winding-up petition.
The petition goes to the High Court if the company's paid-up share capital is over £120,000, or its registered office is in the London insolvency district. Otherwise you can petition the County Court hearing centre for the area of the registered office.
Effect of a winding-up order The Official Receiver is appointed as liquidator at first, company bank accounts are frozen, the directors lose their powers, employees are dismissed (they can claim redundancy pay from the National Insurance Fund if the company cannot pay), and company property comes under the liquidator's control.
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 (such as employees and, for some taxes, HMRC), 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)
Employee claims in insolvency
When an employer becomes insolvent, employees can claim unpaid wages, holiday pay, notice pay, and statutory redundancy pay from the Redundancy Payments Service. There are maximum limits on claims - the RPS recovers what it can from the insolvent estate.
When an employer becomes insolvent, employees can claim certain payments from the Redundancy Payments Service (part of the Insolvency Service). All claims are subject to the statutory weekly pay cap.
Weekly pay cap (2026/27)
£751 per week
Statutory redundancy pay (maximum)
£22,530 (20 years x 1.5 weeks x £751)
Unpaid wages (maximum)
8 weeks at £751 = £6,008
Holiday pay (maximum)
6 weeks at £751 = £4,506
Statutory notice pay (maximum)
12 weeks at £751 = £9,012
Minimum service for redundancy
2 years continuous employment
Holiday pay time limit
Holidays taken or accrued in the 12 months before insolvency
Time to apply
Within 6 months of dismissal
Payment time
Usually up to 6 weeks, but can take longer
Claim money owed from insolvent employer (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.