Facing business insolvency can be daunting, but it’s important to know that there are structured processes and professional support available to help you navigate the next steps.
If your business is struggling to pay its debts, acting swiftly can make all the difference in securing the best possible outcome.
In this blog, we’ll walk you through the business insolvency process, the key decisions you’ll need to make along the way, and the different options available to help you move forward.
Recognising business insolvency
First things first, how do you know if your business is insolvent? A company is legally considered insolvent if it cannot pay its debts or if the value of its assets is less than the amount it owes.
There are numerous warning signs of insolvency, such as persistent cash flow problems, overdue debts, and legal action from creditors. If you suspect insolvency, it’s crucial to seek advice from a licensed insolvency practitioner as soon as possible.
Next steps if your business is insolvent
1. Assess your position
Once you’ve identified that your business is insolvent, the next step is to evaluate whether it can be rescued or if a formal insolvency process is required. This typically involves:
- Reviewing financial statements so you can understand your company’s current financial health.
- Engaging an insolvency practitioner to help you assess your options and guide you through the process.
- Speaking with creditors – open communication with creditors may help to secure breathing space or alternative repayment arrangements.
If there is potential to rescue your business, options such as restructuring, refinancing, or a company voluntary arrangement (CVA) could be explored (which leads us onto our next point!)
2. Explore business rescue options
For many struggling businesses, insolvency does not necessarily mean the end. Depending on your circumstances, there are a variety of solutions available that could help you to rescue your business and turn things around:
Company voluntary arrangement (CVA)
A CVA is an agreement with creditors to repay debts over time, allowing your business to continue trading. It must be approved by at least 75% of creditors (by value) and is a legally binding arrangement.
A CVA may be a suitable option if your business is viable in the long term but needs relief from immediate financial pressures.
Benefits of a CVA
- Allows the business to continue trading.
- Consolidates and restructures debts into manageable repayments.
- Stops legal action from creditors once approved.
- Typically lasts between three and five years, after which remaining debts are often written off.
Learn more about company voluntary arrangements and discover whether a CVA is the best option for you in this helpful blog.
Administration
Administration places the company under the control of an insolvency practitioner, who aims to rescue the business, achieve a better outcome for creditors, or sell the assets to repay debts. It provides legal protection from creditor action, giving your company time to restructure.
Possible outcomes of administration
- Business rescue through restructuring.
- Sale of the business as a going concern.
- Selling company assets to repay debts.
Pre-pack administration
With a pre-pack administration, the company’s assets and business are pre-agreed for sale before entering administration.
Once in administration, the business is sold immediately, minimising any disruption and the new company (often controlled by the same directors) can continue trading without the old debts.
Advantages of a pre-pack administration
- Protects jobs and business operations.
- Maintains customer and supplier relationships.
- Provides a fresh start while avoiding full liquidation.
This option is often used when a business is viable but struggling under its existing financial burdens. Learn more about pre-pack administration and whether it’s right for you here.
Time to Pay Arrangement
If tax debts are a primary concern, you’re not alone. In fact, HMRC is the biggest creditor of businesses in the UK.
If you are struggling to pay your tax bill, all is not lost - you might also be able to negotiate a Time to Pay Arrangement with HMRC to spread payments over an extended period .
Key points about TTP Arrangements
- Can be used for VAT, PAYE, and Corporation Tax debts.
- Helps avoid penalties and legal action.
- Businesses must show they can meet the agreed repayments.
A TTP can be a lifeline for businesses struggling with short-term cash flow problems. Learn more about the process and how it works in this blog.
3. Consider liquidation
If the business cannot be saved and the rescue options discussed above aren’t viable, liquidation may be the logical next step. Liquidation is the formal process of closing the company, selling its assets, and distributing funds to creditors.
Creditors’ voluntary liquidation (CVL)
A CVL is the most common form of liquidation for insolvent companies and is initiated by directors and shareholders when a business is insolvent and no longer viable.
A liquidator sells company assets, settles debts where possible, and formally closes the business. Once the process is complete, the company is formally dissolved.
If you’d like to learn more about creditors’ voluntary liquidation, we answer your most popular CVL questions here.
Compulsory liquidation
If your creditors petition the court due to unpaid debts over £750, the court can order the company into compulsory liquidation. This is often the most severe form of insolvency, and directors should seek professional advice as soon as they receive a winding-up petition.
4. Be aware of director responsibilities
When a business becomes insolvent, your priorities and responsibilities shift and you must now prioritise your creditors’ interests over those of your shareholders. Failure to do so could lead to a number of legal implications, such as wrongful and fraudulent trading accusations:
Wrongful trading
Continuing to trade while knowing the business is insolvent could result in personal liability for company debts.
Fraudulent trading
Deliberately misleading creditors or disposing of assets inappropriately can result in legal action and potential disqualification as a director .
Working with a licensed insolvency practitioner ensures you comply with legal obligations and minimise personal risk.
How McAlister & Co can help with the business insolvency process
At McAlister & Co, we specialise in business rescue and insolvency solutions. If your business is struggling, our expert team can help you assess your options, negotiate with creditors, and guide you through the business insolvency process with clarity and professionalism.
Contact us today for a free consultation to discuss your situation and explore the best path forward.
No matter how challenging your situation, support is available to help you navigate the business insolvency process and move forward with confidence.