The short answer
If your company cannot pay its debts as they fall due, it may be insolvent — and your legal duty shifts to protecting creditors rather than shareholders. The right steps are to stop making the position worse, take advice from a licensed insolvency practitioner early, and consider the options — from informal arrangements and a CVA to administration or a creditors’ voluntary liquidation. Acting early protects both your creditors and you.
Running out of money is frightening, but it is also common, and there is an established framework for dealing with it calmly. The single most important thing is to act early: the sooner you recognise the problem and take proper advice, the more options you have and the lower your personal risk. This guide explains how to tell if your company is insolvent, what to do straight away, and the routes available.
Insolvency first steps at a glance
- Two insolvency tests Cash-flow and balance-sheet
- Duty shifts to Protecting creditors as a whole
- Do immediately Stop worsening creditors’ position
- Get Early advice from a licensed IP
- Options range TTP, CVA, administration, CVL
- Key risk Wrongful trading if you trade on regardless
Is your company actually insolvent?
There are two main tests, both reflected in section 123 of the Insolvency Act 1986. The cash-flow test: can the company pay its debts as they fall due? The balance-sheet test: do its liabilities, including contingent and prospective liabilities, exceed its assets? Failing either can mean the company is insolvent. Insolvency is a financial state, not an automatic end — many insolvent companies are rescued — but once you recognise it, your responsibilities change. Practical warning signs include being unable to pay wages or HMRC on time, relying on the tax you have collected to fund trading, creditors issuing demands or county court judgments, and your bank pressing on an overdraft.
Why your duties change
When a company is solvent, directors act in the interests of shareholders. Once it is, or is likely to become, insolvent, that duty shifts to acting in the interests of creditors as a whole. In practice this means you must not take steps that benefit some creditors or yourself at the expense of the general body of creditors, and you must not let the company keep racking up debts it cannot pay. Ignoring this can lead to a wrongful-trading finding under section 214 of the Insolvency Act 1986 and personal liability for the losses caused to creditors after the point you knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation.
This is not about punishing failure — it is about how you behave once the writing is on the wall. A director who recognises the position, takes advice, and stops the company digging a deeper hole is in a very different place from one who carries on regardless, takes customer deposits they cannot fulfil, or pays off connected creditors first. The law rewards the responsible course, which is also the one that gives the business its best chance.
What to do straight away
- Stop the bleeding — don’t take on new credit or deposits you can’t honour.
- Keep good records — minute key decisions and the reasons for them.
- Treat creditors even-handedly — avoid “preferring” one creditor (or yourself) over others.
- Take advice early — speak to a licensed insolvency practitioner before, not after, things deteriorate.
- Don’t dispose of assets at undervalue — such transactions can be reversed.
Your options — an overview
The right route depends on whether the business is viable. A licensed insolvency practitioner will help you choose:
| Option | Best when |
|---|---|
| Time to Pay / informal deal | A short-term cash-flow gap with a viable business |
| Company Voluntary Arrangement (CVA) | The business is viable but needs to restructure its debts |
| Administration | The business can be rescued or sold with breathing space |
| Creditors’ Voluntary Liquidation (CVL) | The company cannot be saved and should be closed properly |
None of these is a failure of character; they are simply tools matched to circumstances. A viable business with a fixable balance sheet may be saved through a CVA or administration. A business that genuinely has no future is closed properly through a CVL, which deals with creditors fairly and draws a line under the directors’ exposure. The wrong move is to do nothing and let events — usually a creditor’s winding-up petition — take the decision out of your hands. To weigh the formal routes against each other, see liquidation vs administration vs CVA. If closure is the answer, see creditors’ voluntary liquidation.
The bottom line
An insolvent company is not the end of the road, and acting responsibly protects you as much as your creditors. The pattern that causes real problems is trading on while insolvent, taking new money you can’t repay, and avoiding advice. Do the opposite — recognise the position, protect creditors, and get a licensed insolvency practitioner involved early.
Not sure which way to turn?
A licensed insolvency practitioner can tell you whether your company is insolvent and which route fits — often saving a viable business. A confidential call costs nothing and clarifies everything.
Frequently asked questions
How do I know if my company is insolvent?
Apply the two tests: the cash-flow test (can it pay debts as they fall due?) and the balance-sheet test (do liabilities exceed assets?). Failing either suggests insolvency — at which point your duties shift to protecting creditors.
Can I keep trading if my company is insolvent?
Only with great care. Once insolvent, you must not worsen creditors’ position or take on debts you cannot pay. Trading on regardless can lead to a wrongful-trading finding and personal liability, so take advice first.
Will my company definitely have to close?
Not necessarily. Viable businesses are often rescued through a CVA or administration, or saved by a Time to Pay arrangement. Liquidation is only the right answer when the company genuinely cannot be saved.
Who should I speak to first?
A licensed insolvency practitioner. They can assess whether the company is insolvent, set out the realistic options, and help you act in a way that protects creditors and limits your personal risk.
Sources & further reading
- GOV.UK — Options when your company is insolvent
- The Insolvency Service — guidance for company directors
- Insolvency Act 1986 — insolvency tests and wrongful trading (s.123, s.214)
- GOV.UK — Company Voluntary Arrangements and administration
This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.