When a company can no longer pay its debts as they fall due, or its liabilities are greater than its assets, it may be insolvent.
That does not always mean liquidation is inevitable. There may still be options to rescue the business, negotiate with creditors or restructure its debts. However, where the company cannot realistically recover, an insolvent liquidation may be the most appropriate way to bring matters to an orderly conclusion.
At Navigate Business Recovery, we help directors understand the company’s true position, assess the available options and deal with the personal risks that can arise when a company fails.
What Is an Insolvent Liquidation?
An insolvent liquidation is a formal process used to close a company that cannot pay its debts.
The company’s assets are placed under the control of a licensed insolvency practitioner, who will realise those assets and distribute any available funds to creditors in accordance with insolvency law.
The two main forms of insolvent liquidation are a Creditors’ Voluntary Liquidation and a compulsory liquidation.
Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation is usually started by the directors and shareholders when they recognise that the company cannot continue to trade and pay its debts.
A licensed insolvency practitioner is appointed as liquidator. The liquidator then takes control of the company, deals with its assets and creditors and brings the company’s affairs to an orderly conclusion.
For many directors, a Creditors’ Voluntary Liquidation is preferable to waiting for a creditor to issue a Winding Up Petition. It allows the directors to deal with the position proactively and with greater control over the timing of the process.
Before taking this step, it is important to consider whether the company has any realistic prospect of rescue, whether there are personal guarantees, whether the director’s loan account is overdrawn and whether any recent transactions could later be challenged.
Compulsory Liquidation
A compulsory liquidation normally follows the presentation of a Winding Up Petition by a creditor, often HMRC, a supplier or a lender.
If the Court makes a Winding Up Order, the Official Receiver will initially take control of the company’s affairs.
A Winding Up Petition can have an immediate and serious effect. The company’s bank account may be frozen, customers and suppliers may become aware of the proceedings and transactions entered into after presentation of the petition may be vulnerable to challenge.
Directors should therefore seek advice as soon as a petition is threatened or received. Waiting until the Court hearing can make the position much more difficult.
How Do I Know Whether My Company Is Insolvent?
Common warning signs include an inability to pay HMRC, wages, rent or suppliers on time, increasing creditor pressure, missed payment arrangements, County Court Judgments, reliance on further borrowing and a growing gap between what the company owes and the value of its assets.
A temporary cash flow problem does not necessarily mean the company must close. The key question is whether the difficulties can realistically be resolved or whether the company is simply creating more debt.
What Are the Risks for Directors?
Directors are not usually personally liable for company debts simply because the business has failed. However, personal exposure can arise where there are personal guarantees, an overdrawn director’s loan account, unlawful dividends, misuse of company funds or transactions that can later be challenged.
Directors must also take care when deciding whether to continue trading. Once insolvency becomes likely, the interests of creditors become increasingly important.
Particular caution is needed before repaying money owed to directors, paying connected parties, transferring assets, moving customers into a new company or taking further money from the business.
What Happens in Liquidation?
Once the liquidator is appointed, control of the company passes away from the directors.
The liquidator will deal with the company’s assets and creditors, review its financial affairs and investigate the conduct of the directors. The review may cover the reasons for the company’s failure, payments to directors, dividends, HMRC arrears, director’s loan accounts, asset transfers and the use of company funds.
An investigation does not automatically mean that a director has done anything wrong. Businesses fail for many legitimate reasons. The important point is that directors should be able to explain their decisions and provide the relevant records.
What Happens to Employees?
Employees will usually be made redundant unless the business is sold and their employment transfers.
Eligible employees may be able to claim statutory redundancy pay, arrears of wages, holiday pay and notice pay from the National Insurance Fund.
Directors may also be entitled to make certain claims where they were genuinely employed by the company under a contract of employment. Their position will depend on the facts.
Are There Alternatives to Liquidation?
Liquidation should not be chosen before other realistic options have been considered.
Depending on the circumstances, the company may be able to pursue a Company Voluntary Arrangement, refinancing, a sale of the business, a Time to Pay arrangement with HMRC, creditor settlements or another form of restructuring.
The sooner the position is reviewed, the greater the chance of preserving those options.
How Navigate Business Recovery Can Help
We support directors before, during and after the decision to place a company into liquidation.
We can review the company’s financial position, identify the immediate risks, consider rescue and restructuring options, examine personal guarantees, director’s loan accounts and dividends, and help directors prepare for discussions with an insolvency practitioner.
We can also assist directors in responding to questions raised by a liquidator or the Insolvency Service.
Navigate Business Recovery does not accept formal appointments as liquidator. Our role is to provide independent guidance and support to directors and, where a formal process is required, help them deal with an appropriately licensed insolvency practitioner.
Why Early Advice Matters
Directors often wait because they hope that a new contract, investment, customer payment or tax refund will solve the problem.
Sometimes it does. Sometimes the delay simply increases the company’s debts and the director’s personal risk.
Taking advice does not commit the company to liquidation. It gives the director a clearer understanding of the position and the options still available.
Next Steps
If your company is struggling to pay its debts, has received demands from creditors or is facing the threat of a Winding Up Petition, you can book a meeting with Vee here:
ICO reg: ZA292643 | 
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