Insolvency is one of the biggest challenges a business can face. It can result from poor cash flow, mounting debts, or an unexpected market downturn. Many business owners assume insolvency means immediate closure, but that’s not always the case.
If addressed early, businesses may have options to recover, restructure, or close in a controlled manner while minimising financial and legal consequences. This guide explains business insolvency, the warning signs to look out for, and the steps you can take to protect your company.
What is business insolvency?
A company is insolvent when it cannot meet its financial obligations. In the UK, insolvency is legally defined in two ways:
Cash-flow insolvency: When a business cannot pay its bills on time, even if it owns valuable assets. For example, a company might have £500,000 in property but still be unable to pay a £20,000 supplier invoice when it falls due.
Balance-sheet insolvency: When a company’s total debts exceed its total assets, meaning it wouldn’t be able to pay off creditors even if it sold everything it owns.
If a company is insolvent, directors must act in the best interests of creditors. Continuing to trade while knowingly insolvent can lead to serious legal consequences, including personal liability for company debts.
Signs your business may be heading toward insolvency
Cash flow problems
If your business constantly struggles to cover wages, rent, or supplier payments, it may be on the path to insolvency. Poor cash flow is one of the most common reasons businesses fail.
Pressure from creditors
If suppliers or lenders are chasing payments, issuing late fees, or sending statutory demands, it’s a sign that they are losing confidence in your ability to pay.
Unpaid tax bills
Falling behind on VAT, PAYE, or Corporation Tax is a major warning sign. HMRC has strong enforcement powers and can freeze bank accounts or even force company liquidation.
Relying on short-term borrowing
If you frequently extend overdrafts or take out loans just to meet regular expenses, your business could be in financial trouble. Short-term borrowing can provide temporary relief, but relying on it to stay afloat is unsustainable.
Declining sales and profitability
If revenue falls while costs remain high, your business may struggle to pay its bills. A prolonged decline in profits can quickly lead to insolvency.
Legal action from creditors
If creditors take legal action and obtain a County Court Judgment (CCJ), the situation is serious. Unpaid CCJs can lead to bailiff enforcement or even a winding-up petition, forcing the company into liquidation.
How to protect tour company from insolvency
Improve cash flow
Keeping cash moving through your business is crucial. Encourage early customer payments, chase overdue invoices, and cut unnecessary expenses where possible. Setting aside a cash reserve can help cover unexpected costs.
Manage debt effectively
If debts are becoming unmanageable, speak to creditors as soon as possible. Many lenders and suppliers are willing to renegotiate repayment terms. Consolidating multiple loans into a single, lower-interest loan may also help. If financial pressure continues, a Company Voluntary Arrangement (CVA) could allow you to repay debts while continuing to trade.
Seek professional advice early
An insolvency practitioner can help assess your company’s financial position and recommend solutions. The earlier you seek advice, the more options you’ll have to avoid liquidation.
Avoid wrongful trading
If your company is already insolvent, you must stop trading immediately. Continuing to operate while increasing company debts can result in personal liability for directors. If you suspect insolvency, seek expert advice as soon as possible.
What to do if your company is already insolvent
Company Voluntary Arrangement (CVA)
A CVA allows businesses to negotiate a repayment plan with creditors and continue trading. This can help struggling companies avoid liquidation while repaying debts over time.
Administration
Administration provides legal protection while an appointed administrator attempts to rescue, sell, or restructure the business. During this process, creditors cannot take legal action against the company.
Creditors’ Voluntary Liquidation (CVL)
If a business is no longer viable, a Creditors’ Voluntary Liquidation (CVL) may be the best option, allowing directors to close the company in an orderly and legal manner. Through this process, the company’s assets are sold to repay creditors, with any remaining debt written off.
Opting for a CVL is often preferable to being forced into compulsory liquidation by creditors. In 2024, CVLs accounted for approximately 79% of all company insolvencies, with 18,840 cases recorded.
Taking proactive steps to protect your business
Insolvency doesn’t happen overnight. The warning signs are often there, but many businesses ignore them until it’s too late. The key is to act quickly.
By monitoring cash flow, managing debt responsibly, and seeking professional advice early, businesses can improve financial stability and avoid unnecessary risks. If insolvency is unavoidable, choosing the right process can help protect directors and close the business in a legal and structured way.
