The Ultimate Legal Guide To Company Insolvency & Bankruptcy
If you are facing the threat of corporate insolvency, early action may help you navigate your financial troubles, avoid bankruptcy, and come out the other side stronger than ever. And where it is no longer possible to continue trading, we provide expert advice to help you through the company liquidation process and ensure the best possible outcome for your directors, employees, and creditors.
Do you need corporate insolvency legal advice?
At Summit Law, we help our clients through the bankruptcy and insolvency process and are industry leaders in providing specialist advice and representation in this field.
We regularly support businesses with complex insolvency matters, including where there are cross-border and international offshore issues.
- Comprehensive support. We advise on all aspects of business restructuring, debt management and cash flow improvement. We also advise and assist with company voluntary arrangements, compulsory and voluntary liquidations, receiverships, and administrations.
- Commercial approach. With an eye on your bottom line, we get to grips with the problem to find an answer to your challenges as quickly and cost-effectively as possible.
- Industry recognition. We have been awarded the prestigious Lexcel Accreditation status, demonstrating our commitment to client care. We are proud to have been nominated as Insolvency Law Firm finalists of the year.
- Supportive team. On your side through what can be the most emotionally draining and challenging time of your business life, our advice is pragmatic and sympathetic to your situation.
With an open and honest approach, we make the most complicated insolvency situations easy to understand. To book your free consultation, simply call us today on 020 7467 3980 or complete the enquiry form on this page.
Company insolvency stats & figures
Financial stability is an ongoing challenge for many companies. With the specter of bankruptcy and liquidation looming across industries, insolvency statistics serve as a crucial barometer, providing insights into the economic climate and industry-specific challenges.
By looking at these statistics, we aim to shed light on the trends, patterns, and contributing factors that influence the ebb and flow of company insolvencies.
- The number of registered company insolvencies in January 2024 was 1,769, 5% higher than in the same month in the previous year. {GOV.UK}
- The company insolvencies in January 2024 consisted of 339 compulsory liquidations, 1,294 creditors’ voluntary liquidations (CVLs), 120 administrations, and 16 company voluntary arrangements (CVAs). {GOV.UK}
- The Centre for Economics and Business Research has raised its forecast for corporate insolvencies in 2024 from 28,000 to 33,000. Additionally, The companies predicted to go bust in 2024 and 2025 are primarily those that got into financial trouble in the Covid years and never recovered. {Cerb}
- In 2023, there were 25,158 registered company insolvencies, comprising 20,577 creditors’ voluntary liquidations (CVLs), 2,827 compulsory liquidations, 1,567 administrations, 185 company voluntary arrangements (CVAs) and two receivership appointments. {GOV.UK}
- The number of company insolvencies in 2023 was the highest annual number since 1993. {GOV.UK}
- All large industries saw increased insolvencies in 2023 compared to 2022 {GOV.UK}
- There was a 25% jump in the number of businesses facing “critical” financial distress in the final three months of 2023. {Begbies Traynor}
- In Q4 2023, critical financial distress grew rapidly in the Construction (+32.6%), Health & Education (+41.3%), Real Estate & Property Services (+24.7%) and Support Services (+23.6%) sectors. {Begbies Traynor}
- More than 47,000 businesses were near collapse in the UK at the start of 2024. {Begbies Traynor}
What is company insolvency?
Corporate insolvency happens when a business runs out of money and can no longer meet its financial obligations. The legal framework for dealing with corporate insolvency is primarily governed by the Insolvency Act 1986.
Section 123 of the Insolvency Act 1986 states that a company is deemed “unable to pay its debts” where:
- The company has not paid, secured, or compounded a claim for a sum due to a creditor exceeding £750 within three weeks of having been served with a written demand in the statutory form (known as a statutory demand).
- A creditor has attempted execution or another enforcement process against the company in respect of a debt without success.
- It is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due (commonly referred to as the cash flow test).
- It is proven to the satisfaction of the court that the value of the company’s assets is less than its liabilities, taking into account contingent and prospective liabilities (commonly referred to as the balance sheet test).
While insolvency can lead to a company being closed down, the directors of the company may be able to do certain things to keep it running.
However, a word of warning! If a business is found to be insolvent but continues trading, the directors could be accused of wrongful trading and may be held personally liable for some or all of the company’s debts.
When is a company insolvent?
- CASH FLOW TEST
A company is cash flow insolvent when it cannot meet its short-term financial obligations, such as paying bills or servicing debts as they are due (as well as those that fall due in the ‘reasonably near future’). A business can be cash insolvent but still have assets that exceed its liabilities. In such cases, the company may have to liquidate its assets to meet any outstanding debts.Examples of cash flow insolvency may include*:- Where a business regularly and considerably fails to meet the payment terms imposed by its creditors.
- Where a company is finding it challenging to meet its payroll obligations and is frequently delaying employee salary payments.
- Where a company is consistently negotiating with creditors to delay payments or restructure debt.
- BALANCE SHEET TEST
Balance sheet insolvency occurs when a company’s liabilities exceed its assets, indicating that the business may not be able to meet its long-term obligations, such as repaying creditors. Companies in such situations may need to restructure their debt or take other measures to improve their financial position. Examples of balance sheet insolvency may include*:- Where a business is unable to cover its short-term obligations with readily available liquid assets.
- Where a business has a high debt-to-equity ratio.
- Where the value of a company’s assets declines significantly, potentially impacting its ability to cover its liabilities.
- Where a company has significant unfunded liabilities.
What are the warning signs of company insolvency?
Unfortunately, just because a business is profitable does not mean it won’t become insolvent. Cash flow problems can arise when you least expect them, and factors outside a company’s control can greatly impact its financial health.
Some situations, like the Covid pandemic, happened almost overnight. However, businesses don’t usually fall into trouble that quickly. If stakeholders pay attention to the early warning signs, they may be able to do something about any money problems before the situation worsens. Here are some of the most common warning signs of company insolvency:
- Cash flow issues. Persistent difficulty in paying suppliers, creditors, or meeting regular payment obligations.
- Legal warnings. Receiving legal notices, demand letters, or warnings from creditors.
- Deteriorating relationships. Problems with key stakeholders such as suppliers, customers, or lenders.
- Increasing debt. A rapid increase in debt without a corresponding increase in revenue or profitability.
- Declining profit margins. A consistent decline in profit margins over a significant period.
- Lack of liquidity. Difficulty converting assets into cash, and low levels of liquid assets compared to current liabilities.
- Reduced creditworthiness. A downgrade in credit ratings by credit agencies and/or an inability to raise capital or secure funding.
- Over reliance on short-term financing. Dependence on short-term loans or credit to cover long-term financial needs. Having to sell key assets to generate cash.
- Declining market share. Loss of market share and competitiveness.
- Market conditions. Adverse changes in economic or industry conditions affecting the business.
- Management Issues. Ineffective leadership, lack of strategic direction, or internal conflicts.
- Delayed financial reporting. Consistent delays in publishing financial statements.
The corporate insolvency process
There are five main insolvency procedures in the UK. These are administration, administration receivership, company voluntary arrangement, creditors voluntary liquidation, and compulsory liquidation.
Often, money troubles are temporary, and initiating some of these procedures can rescue a company. However, If the situation gets so bad that the business can’t be saved, an insolvency practitioner (IP) or official receiver (OR) will need to step in and take control.
- ADMINISTRATION
Where a company is (or is likely to become) insolvent, it can enter into administration. Through this process, administrators take over the day-to-day management and control of the business (usually for up to one year unless an extension is agreed with the court). A company and its directors, or one or more of its creditors can start the administration process.Once a company enters administration, its creditors cannot start any legal action (or continue any existing action) to recover assets without permission from the court. As such, administration often provides the breathing space needed to formulate an emergency strategy and rescue a business as a going concern.Administration may result in a better outcome for creditors than if the business was wound up. However, when the business cannot be saved, the administrators will seek to maximise the company’s assets to distribute to secured or preferred creditors (often including employee claims and pension schemes).
- ADMINISTRATIVE RECEIVERSHIP
Limited companies sometimes take on “fixed” and “floating” charges to secure financing. Secured lenders (usually banks or other financial institutions) often demand these charges before loaning a business money.In some situations, a secured creditor may lose faith in a company’s ability to repay its debt to them. Administrative receivership enables these creditors to appoint a licensed insolvency practitioner to sell the business’s assets and recover the money owed. Only secured creditors can begin the administrative receivership process.Administrative receivership was all but abolished in 2003, subject to some important (but limited) exceptions.
- COMPANY VOLUNTARY ARRANGEMENT
A company voluntary arrangement (CVA) is a binding agreement between a struggling business and its creditors. It sets out how the company will pay back all, or part of its debts, over an agreed period. A CVA allows the company to continue trading; as such, it is a welcome and widely used tool for companies in financial difficulty.Directors may seek professional advice to assess the financial health of their business and propose a CVA if they believe it to be viable option. An insolvency practitioner must supervise the implementation of a CVA.At a creditor’s meeting, the creditors will accept, reject, or modify the CVA proposal. Usually, around 75% of the creditors (by debt value) must approve the proposal for it to become binding. Legal action is typically halted during the CVA period. However, if the company fails to meet the terms of the agreement, it may lead to further insolvency proceedings.
- COMPULSORY LIQUIDATION
Compulsory liquidation happens when a business’s creditors petition for it to be liquidated. This usually occurs after the creditor has made several unsuccessful attempts to recover the debt.Creditors can apply to the High Court to serve the debtor company with a winding-up petition. The struggling company has seven days to challenge the application, pay its debt, arrange a company voluntary arrangement (CVA), or enter administration.Where liquidation is the only option, an official receiver (OR) or insolvency practitioner will sell the company’s assets to pay as much as possible of the debts owed. However, unsecured creditors may be left with nothing.
- CREDITORS VOLUNTARY LIQUIDATION
In some cases, rather than struggling with unmanageable debts, a company will decide to cease trading and close; this is known as creditors’ voluntary liquidation (CVL).Initiated by the company’s directors, a CVL arrangement allows for the voluntary winding down of a company and the liquidation of its assets.With CVL, an insolvency practitioner is appointed to take over the control of the company. As this is a voluntary process, the directors can appoint a suitably licensed insolvency practitioner of their choice. This provides a degree of control over the process. Creditors’ voluntary liquidation can also be quicker than compulsory liquidation.
The risks of trading while insolvent
Trading while insolvent in the UK can pose serious legal and financial risks for directors and the company itself. Seeking professional advice from insolvency practitioners or insolvency solicitors is crucial to understanding the options available and avoiding the pitfalls associated with trading while insolvent.
These risks include:
- WRONGFUL TRADING
Directors must always act in the best interests of the company and its creditors. So, if they allow a business to continue trading when they know, or should know, that there is no reasonable prospect of avoiding insolvent liquidation, they could be held personally liable for wrongful trading. This means they may be required to contribute to the company’s assets to cover some of its debts.Directors may also be investigated for fraudulent trading, a serious criminal offence. Misfeasance or breach of duty claims may also be made to secure compensation from directors.
- DIRECTOR DISQUALIFICATION
Directors found guilty of wrongful trading may be disqualified from serving as directors for a specified period. Disqualification can impact their ability to run other companies during that time.To learn more about this topic, please read our director disqualification legal guide.
- REDUCED RECOVERY FOR CREDITORS
Suppose a company continues to trade while insolvent and eventually enters insolvency proceedings. In that case, creditors may receive a lower return on their debts than if the company had ceased trading earlier.This is because the company’s financial position may deteriorate further, reducing the value of its assets. Creditors may also run up their own costs by continuing to supply the struggling company.
- EMPLOYEE CLAIMS
Directors may be personally liable for unpaid employee wages, redundancy payments, and other employment-related claims if the company knowingly trades while insolvent. - LOSS OF BUSINESS REPUTATION
Trading while insolvent can harm a company’s reputation. Suppliers, customers, and other stakeholders may lose trust in the business, making it difficult to maintain relationships and secure future contracts.
The Insolvency Act 1986
The Insolvency Act 1986 is a crucial piece of legislation in the United Kingdom. It not only sets out various procedures for dealing with insolvent companies (as outlined earlier in this guide), it also covers individual insolvency procedures, such as individual voluntary arrangement (IVA) and bankruptcy. In addition, the Act:
- Outlines the duties and responsibilities of directors in the event of insolvency and includes provisions for fraudulent trading.
- Provides the legal framework for the liquidation of companies and the distribution of assets to creditors in a fair and orderly manner.
- Contains provisions related to transactions that can be deemed voidable, including preferences, transactions at an undervalue, and extortionate credit transactions.
- Allows for the temporary suspension of certain legal actions against a company during insolvency procedures, providing a breathing space to explore rescue options.
- Defines the roles and powers of insolvency practitioners or office holders appointed to oversee insolvency proceedings.
- Sets out the procedures for convening and conducting creditors’ meetings where important decisions, such as approval of a CVA, are made.
The Insolvency Act 1986 has been subject to amendments and updates over the years. If you require specific and up-to-date information, it’s advisable to seek professional legal advice. At Summit Law, our insolvency solicitors refer to the most current versions of the legislation and any subsequent amendments.
The Corporate Insolvency and Governance Act 2020
The Corporate Insolvency and Governance Act 2020 (CIGA) introduced three new measures to help relieve the burden on businesses during and after the Covid-19 pandemic. The permanent measures introduced by the Act are:
- A new restructuring plan to help viable companies struggling with debt obligations. While creditors vote on the plan, the court may “bind” dissenting creditors to the proposal if it is “fair and equitable”.
- A free-standing moratorium – outside of any formal insolvency procedure – to give UK companies the “breathing space” in which to pursue a rescue or restructuring plan. During this freeze, no creditor can take action against a company without the court’s permission. The moratorium cannot be used to delay an inevitable liquidation.
- New rules preventing suppliers from stopping their supply while a company is going through a rescue process. Safeguards have been established to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business.
What is an insolvency practitioner?
Where insolvency cannot be avoided, an insolvency practitioner (IP) or official receiver (OR) will take control of the business assets. The primary objective of any insolvency practitioner (or OR) is to maximise returns to creditors and ensure that all creditors are treated fairly and equally in proportion to their claims.
Insolvency practitioners (IPs)
Where significant assets or sums of money are involved, the official receiver will appoint an Insolvency Practitioner. IPs are usually accountants or solicitors qualified and licenced to deal with insolvency issues. An IP can also be privately appointed by creditors or nominated by the court in some situations.
Official receiver (OR)
ORs are civil servants appointed by the Secretary of State. If your company enters insolvency, the Insolvency Service (an executive agency of the Department of Business, Innovation and Skills) will appoint an OR to oversee your case.
The OR will administer your company’s insolvency when the amount of money involved is considered minor. They also investigate the affairs of companies in liquidation and report to the Insolvency Service if they believe an individual is unfit to be a director.
Do I need an insolvency practitioner if our company is insolvent?
The decision to appoint an insolvency practitioner (IP) depends on your company’s financial situation and the specific insolvency procedure you are considering. Even if your company has yet to reach the point of insolvency, an IP may be able to help, and you can get assistance from an IP without entering the official insolvency process.
Here are some general guidelines on when you might need to appoint an insolvency practitioner:
- When your company has financial problems. If your company is experiencing financial distress, even if you think it might be temporary, you should get advice from a qualified solicitor, accountant, authorised insolvency practitioner, or financial adviser. However, you do not need to appoint an IP at this stage.
- To carry out an insolvency assessment. If it becomes clear that your company is insolvent or at risk of insolvency, appointing an insolvency practitioner is recommended. They can help you navigate the available options and determine the most suitable insolvency procedure for your circumstances.
- If you decide to cease trading. If there is no reasonable prospect of recovery, an IP can guide you through the appropriate insolvency procedures, such as creditors’ voluntary liquidation (CVL) or administration.
- If you want to restructure. If you believe the company has a viable future, an insolvency practitioner can assist in formulating a restructuring plan.
- When starting formal insolvency proceedings. Appointing an insolvency practitioner is a formal step in the insolvency process. At this stage, the IP will take control of the proceedings, ensuring compliance with the various legal requirements, including the realisation and distribution of any assets.
Corporate Restructuring and Insolvency – FAQs
There is no set timescale for company bankruptcy and insolvency; it all depends on your business’s position, size, legal issues, and the type of insolvency process:
- Administration is intended to be a short-term process, with the initial period usually set at up to one year
- The company voluntary arrangement process, once agreed, typically lasts for a fixed term, often three to five years
- The creditors’ voluntary liquidation process can vary in duration but is generally completed within a few months
- Compulsory liquidation is often completed within a few months.
Yes. Insolvency does not necessarily mean the end of a business; instead, it may signal a financial crisis that requires attention to return to solvency. Recovery from insolvency is often complex and challenging, but businesses can deploy several strategies to turn things around, for example:
- Negotiating with creditors to restructure debts
- Developing and implementing a comprehensive business turnaround plan
- Streamlining operations
- Implementing robust cash flow management practices
- Selling non-core assets
- Securing new investment or financing
- Leadership changes
- Reassessing the company’s market positioning and offering.
Professional advice is critical during the recovery process, and early intervention and proactive measures increase the likelihood that a company will fully recover from insolvency.
While an undischarged bankrupt is generally prohibited from acting as a company director, they may be able to do so with permission from the court. The court will consider the circumstances and may grant permission for a specific period or with certain conditions.
The court may also refuse permission based on the individual’s conduct or the nature of the proposed directorship. Acting as a director without court permission while being an undischarged bankrupt is a criminal offence and can result in fines, imprisonment, or both.
Yes. However, even after the disqualification period ends, some individuals may still face restrictions, and their ability to act as a director may be subject to conditions. Individuals considering becoming a director after insolvency should seek professional legal advice to understand the specific implications of their situation.
You can search for details of companies involved in insolvency proceedings on The Gazette’s website. Companies House also offers an online search facility where you can check the trading status of a company.
Are you looking for expert corporate insolvency legal advice?
In the complex and often daunting realm of corporate bankruptcy and insolvency, having a reliable and knowledgeable legal partner by your side is paramount. Our commitment to providing pragmatic and commercial advice has made us a trusted adviser for business owners, directors, shareholders, and creditors alike.
Whether it’s litigation, dispute resolution, or crafting a pathway out of financial distress, we prioritise our approach to ensure the legal strategy is always centered on achieving the best possible outcome for our clients.
For your free consultation with our expert insolvency solicitors, please call our London office on 020 7467 3980 or simply complete the enquiry form on this page.