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Is my business insolvent?

To find out if your business is insolvent, you can put it to two tests.

1. The cash-flow test
List out the different types of income that your business has. Then list out the expenses.
If you don’t have enough cash to pay staff, suppliers, HMRC, creditors, etc. on time and in full in the long-term then your business is insolvent.

2. The balance-sheet test
This weighs your assets against your liabilities. Calculate your assets (stock, premises, equipment, monies owed, cash in the bank) against your liabilities (debts to suppliers, your bank or other creditors).
Don’t under- or over-estimate your assets and liabilities. You need an accurate picture of your company’s position to decide on the best course of action.
Appointing an licensed insolvency practitioner might be a good idea at this stage, so they can help you decide on the best solution.

What is a phoenix company?

A phoenix company is the company that’s put in place to take over the useful and necessary assets of a former insolvent company. This is usually set up as part of a company administration or liquidation.

What does ‘pence in the £’ mean?

It’s helpful to use an example here.
If you owe £1000 we might offer your creditors 40p in the £1 – or 40p back for every £1 you owe to them. This is 40% of the total debt.

What is the difference between insolvent and solvent liquidation?

If a company is solvent it has enough assets to pay its debt in the long-term. There might be a temporary problem with cash flow but its overall solvency is good. Insolvency means that the company doesn’t have enough cash to cover its debts, now or in the long term. You can use the cash-flow and balance sheet tests to see if your business is solvent or insolvent.

What is a licensed insolvency practitioner?

A licensed insolvency practitioner (IP) is someone licensed to act on behalf of companies and individuals in informal and formal insolvency procedures, and during the closure of a solvent company. Only a licensed practitioner may act as liquidator of a company, either solvent or insolvent.

What is a ‘strike off’?

This is an informal way to close a limited company that’s no longer needed and is not actively trading. Directors can request to have the company ‘struck off’ the register and dissolved without going through a liquidation process as long as it:

  • hasn’t traded or sold off any stock in the last three months
  • hasn’t changed its name in the last three months
  • isn’t threatened with liquidation
  • has no agreements with creditors, like a Company Voluntary Arrangement (CVA)

Although striking off the company can be the cheapest way to close, a Members’ Voluntary Liquidation might be the most tax-efficient method depending on the amount of funds for distributing to shareholders. The tax saving will often be far greater than the cost of the liquidation process.

Who pays for a company liquidation?

This depends on the form of liquidation. In a Creditors’ Voluntary Liquidation (CVL) , the company usually pays but if it cannot afford to then the directors and shareholders will need to contribute to cover the costs.

With Compulsory Liquidation , the creditor instigating the liquidation pays a deposit to cover the fees. If there are no assets then they get nothing back. The insolvency service that does the liquidation is funded by the Government and will cover any outstanding costs.

Because a Members’ Voluntary Liquidation (MVL) is a solvent liquidation, the company assets cover the costs.

What is an Administrative Receivership?

Administrative Receivership is when a creditor who has a charge over assets such as cash or stock appoints an insolvency practitioner to act as Administrative Receiver to recover the money owed to them. This is now only applicable to charges pre-date 15/09/03. Instead, a company administration would now be used.

What are a director’s responsibilities in a liquidation?

As a director, there are strict guidelines to follow when liquidating your company. These are:

  • Once you agree the company is insolvent – which means it cannot meet its debts – it’s your responsibility to make sure it stops trading immediately. This is to reduce the damage to the company but also to protect you as a director.
  • Do not take on any more debt. You should also try to secure assets that can be sold by the liquidator. If you do continue to trade knowing your business is insolvent, you’ll face an investigation by the Insolvency Service and could be prosecuted.
  • As a director, you need to call a shareholders’ meeting and reach an agreement about ‘winding up’ the company. A licensed insolvency practitioner will be brought in to handle the sale of assets and manage the liquidation.
  • You must provide all right information to the liquidator at the requested time, including financial records and other paperwork for the company.

contact us about how to begin your liquidation.

How can the Corporate Insolvency and Governance Act 2020 save your business?

This Act, which came into force on 26th June 2020, allows SMBs valuable time to formulate a rescue and restructuring plan. It gives small businesses the ability to apply for a formal ‘moratorium’ that lasts for an initial period of 20 business days. During this time, no legal action from the majority of creditors can be taken against a company without court permission. If you want to take advantage of this Act, please call 01455 555444 or contact us to see how we can help you.

Bailiff advice

If you owe money to creditors, then instructing bailiffs is one action these creditors can take to try and retrieve some of these funds by taking your things away and selling them. You do not have to open your door or let bailiffs inside your home. If you’ve received letters stating that bailiff action will be taken do not ignore them. Try to contact the creditor who is threatening yourself with Bailiff action and see if you can agree a payment plan in order to repay the debt.

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