Insolvencies in the UK are at a 14-year high, and directors face more pressure than ever. Understanding how to close an insolvent company properly is crucial to avoid personal liability and protect your future. Chris Worden from Director First explains the key steps and risks.
- Insolvency is determined by cash flow and balance sheet tests
- Directors must prioritise creditors once insolvent
- Two main closure routes: voluntary and compulsory liquidation
- Voluntary liquidation offers more protection for directors
- Personal guarantees and overdrawn loan accounts are key risks
- Act early and seek advice to minimise personal exposure
What Does Insolvent Mean?
Insolvency is not about how you feel—it's about the numbers. There are two main tests:
- Cash flow test: Can you pay debts as they fall due?
- Balance sheet test: Are your liabilities greater than your assets?
If you fail either test, your business is legally insolvent and your duties as a director change. You must now prioritise creditors over yourself.
How to Close an Insolvent Company
1. Creditors' Voluntary Liquidation (CVL)
This is where you, as the director, choose to close the company. The process involves:
- Appointing a licensed insolvency practitioner (IP)
- Board and shareholder approval (75% needed)
- Notifying creditors and holding a creditors' meeting
- The IP/liquidator sells assets and investigates director conduct
Acting responsibly and transparently protects you from most personal risks. Chris Worden highlights the importance of working with the IP and staying involved.
2. Compulsory Liquidation
This occurs when creditors (often HMRC) petition the court to wind up your company. Consequences include:
- Frozen bank accounts
- Official Receiver investigation
- Greater risk of personal liability and director disqualification
Compulsory liquidation is usually more damaging than voluntary liquidation.
Key Risks for Directors
- Personal guarantees: These remain after liquidation and may be enforced
- Overdrawn director's loan accounts: You may have to repay these personally
- Wrongful trading: Continuing to trade while insolvent can lead to personal claims
- Preference payments: Paying some creditors over others can be challenged
How Are Creditors Paid?
- Secured creditors (with charges over assets)
- Preferential creditors (including HMRC)
- Unsecured creditors (suppliers, landlords, etc.)
Staff may claim redundancy and other entitlements through the Redundancy Payments Service.
How to Protect Yourself
- Act early and seek advice
- Document all decisions and communications
- Be transparent with the insolvency practitioner
- Choose voluntary liquidation over compulsory where possible
Key Takeaways
- Recognise insolvency early using cash flow and balance sheet tests
- Voluntary liquidation is safer for directors than compulsory liquidation
- Personal guarantees and overdrawn loans are major risks
- Work with a reputable insolvency practitioner
- Chris Worden and Director First can help you navigate the process
FAQs
- What is the difference between voluntary and compulsory liquidation?
- Voluntary liquidation is initiated by directors, offering more control and protection. Compulsory liquidation is forced by creditors through the courts and carries higher risks for directors.
- Will I be personally liable for company debts?
- Generally, no, unless you have personal guarantees, overdrawn director's loans, or have traded wrongfully.
- What happens to staff during liquidation?
- Staff can claim redundancy, unpaid wages, and holiday pay through the Redundancy Payments Service if eligible.
- How quickly should I act if my company is insolvent?
- Act immediately. Early action and advice can protect you from personal liability and minimise losses.
- Can I start another company after liquidation?
- In most cases, yes, unless you are disqualified as a director due to misconduct.
Need confidential advice? Contact us today for a free, no-obligation discussion about your options.
