If your company is struggling to meet its financial commitments, you may be worried about whether it is insolvent or not. At BRI Business Recovery and Insolvency, we understand how stressful and uncertain a time like this can be. The good news is that insolvency doesn’t always mean the end — there are options that can help rescue or close your business in an orderly way.
If you’re concerned about your company’s financial position, however, don’t wait. Contact our expert team today for a confidential, no-obligation chat.
What is Business Insolvency?
Business insolvency occurs when a company cannot pay its debts as they fall due, or when its liabilities exceed its assets. In simple terms, this means the business either lacks the cash to keep up with its obligations, or it owes more than it owns.
Recognising the point at which a business becomes insolvent is crucial. Directors have a legal responsibility to act in the best interests of creditors once insolvency is identified. Acting quickly gives you the best chance of saving the business, protecting employees, and avoiding personal risks for directors.
The Two Main Insolvency Tests
There are two recognised ways to assess whether a business is insolvent:
1. The Cash Flow Test
This looks at whether the company can pay its bills on time. For example, if you are unable to pay suppliers, HMRC, or employees when payment is due, the company may be cash flow insolvent.
2. The Balance Sheet Test
This compares your company’s total assets with its total liabilities. If your liabilities (including loans, tax, and potential claims) are greater than your assets, the company is balance sheet insolvent.
It is possible for a company to pass one test but fail the other. Either scenario can still indicate insolvency.
Common Warning Signs of Business Insolvency
Directors often notice certain patterns before formal insolvency is confirmed. Warning signs include:
- Consistent late payments to suppliers.
- Pressure from HMRC or threats of legal action.
- Creditors refusing to extend terms.
- Difficulty meeting payroll.
- County Court Judgments (CCJs) or winding up petitions.
If any of these apply to your business, it’s vital to seek professional advice immediately.
Director Responsibilities When Insolvency is Suspected
Once insolvency is likely, your responsibilities as a director change. Instead of prioritising shareholders, your duty shifts to protecting creditors. Continuing to trade while knowingly insolvent can result in allegations of wrongful trading, personal liability, or disqualification as a director.
Taking early, responsible action is the best way to safeguard both the business and your own position. This usually means contacting a licensed insolvency practitioner (IP), like BRI – Business Recovery and Insolvency, to review the company’s situation and recommend next steps.
Options Available to Insolvent Companies
Depending on your circumstances, there are several potential routes forward. The most common procedures include:
Informal Agreements with Creditors
In some situations, it may be possible to reach an informal arrangement directly with creditors. This could involve agreeing reduced payments, extended deadlines, or a structured plan to clear debts over time. These agreements are not legally binding and can be ended by either party, so they do carry some risk.
A similar option with HMRC is a Time to Pay Arrangement, where tax liabilities are spread over a longer period. HMRC will only agree to full repayment, but this can still provide essential breathing space.
While these informal routes can work well for businesses with fewer creditors, they may not suit every case.
Company Moratorium
In certain cases, a business may benefit from a moratorium — a legal pause on creditor action that gives directors time to explore rescue or restructuring options. During this period, creditors cannot begin or continue legal proceedings, and the directors remain in control of the company. A moratorium typically lasts for 28 days and can be extended, offering valuable breathing space to stabilise the business.
Creditors’ Voluntary Liquidation (CVL)
This is the most frequent option when a company cannot be rescued. The business closes in an orderly way, assets are sold, and creditors are repaid as far as possible. Employees can make claims for certain entitlements through the government scheme.
Administration
Administration can provide breathing space from creditor pressure while an insolvency practitioner works to rescue or sell the business. This option can help preserve jobs, protect the company’s value, or prepare for a managed sale.
Company Voluntary Arrangement (CVA)
A CVA allows a company to reach a legally binding agreement with creditors to repay debts over time, while continuing to trade. This option is often suitable for businesses that are fundamentally viable but need breathing room to recover.
Court Approved Restructuring Plans
In some cases, a company may be able to use a Court Approved Restructuring Plan to reach a compromise with creditors. Similar in some respects to a CVA, this route allows debt to be restructured and repaid over time, but with added flexibility. Even if certain classes of creditors vote against the plan, the Court can still approve it if it believes the outcome is fair and in the interests of the majority.
Restructuring plans are complex and require court involvement, but they can provide a lifeline where other solutions are not workable.
What Happens if Insolvency is Ignored?
If insolvency is not addressed, the situation usually worsens. Creditors may take enforcement action, such as issuing a winding up petition to force the company into compulsory liquidation. Directors who allow a company to continue trading while insolvent may face serious consequences, including personal liability for company debts.
By contrast, taking prompt advice demonstrates responsible behaviour and often results in better outcomes for directors, employees, and creditors alike.
How BRI – Business Recovery and Insolvency Can Help
At BRI – Business Recovery and Insolvency, we provide clear, confidential, and practical advice for directors and business owners facing financial difficulty. Our licensed insolvency practitioners have decades of experience across all types of procedures, from company rescue to liquidation.
With offices across the UK, we’re here to help you understand your options and take the right steps — whether that’s restructuring, selling, or closing your company in the most appropriate way.
Get Help with Business Insolvency Today
If your company is unable to meet its financial obligations, don’t ignore the warning signs. Business insolvency is a legal process designed to protect creditors and provide clarity for directors. Acting early can help save your business or ensure it is closed in a professional, compliant manner.
Contact BRI – Business Recovery and Insolvency today for confidential advice and practical support. We offer a free, no-obligation consultation where we will listen to your situation and help you understand the options available. The sooner you reach out, the more options you’ll have available. Our friendly team is here to help.