If your company can't pay its debts, you have three broad choices: negotiate more time with creditors, use a formal rescue procedure, or close the company down in an orderly way. Which route fits depends on how much cash is coming in, how many creditors are pushing, and whether the underlying business is still viable.
This isn't a decision to make alone, or in a panic. Directors who face the reality early, and take proper advice, almost always end up with more options than those who wait for a winding-up petition to land.
Facing the reality: when your company can't pay its debts
A company can't pay its debts when its bills, including tax, wages, rent and supplier invoices, exceed the cash it has or can raise in time. This is sometimes called being cash-flow insolvent — able to meet debts eventually, perhaps, but not as they fall due.
It's worth checking where you actually stand before choosing a path. A short cashflow forecast, even a rough one, usually shows whether the gap is temporary or structural. If you're unsure whether the company meets the legal definition of insolvency, Is My Company Insolvent? The Two Legal Tests sets out the two tests used in law.
Common warning signs include:
- Repeatedly delaying payments to HMRC, suppliers, or the landlord
- Using new borrowing to pay off older debts
- Receiving statutory demands or county court judgments
- Struggling to make payroll or VAT payments on time
Informal options: negotiation and time to pay
If the business is fundamentally sound but short of cash right now, informal steps are often the first port of call. These don't involve a court or a formal insolvency process, so they're quicker and cheaper — but they only work with creditors willing to cooperate.
Options directors commonly explore include:
- Time to Pay arrangements with HMRC — a payment plan agreed directly with HMRC to spread tax arrears over several months
- Negotiated payment plans with suppliers or the landlord — extending terms or agreeing a reduced schedule
- Refinancing or asset-based lending — releasing cash tied up in invoices, stock or equipment
- Cost-cutting and cashflow discipline — reviewing overheads, staffing and payment terms
These routes can buy breathing space, but they don't stop a creditor pursuing recovery action if talks break down. If cashflow pressure is the root problem rather than deeper insolvency, Business Cashflow Crisis: How to Take Control covers the practical steps in more depth.
Formal rescue routes explained simply
When informal talks aren't enough, or debts are too large or too many creditors are involved, a formal rescue procedure under the Insolvency Act 1986 may be more appropriate. These are legal processes run with, or by, a licensed insolvency practitioner.
The main rescue options include:
- Company Voluntary Arrangement (CVA) — a formal agreement with creditors to repay a proportion of debts over time, while the company keeps trading
- Administration — a licensed insolvency practitioner takes control of the company to protect it from creditor action while a rescue plan is worked out
- A moratorium — a legal pause on most creditor action, giving directors breathing space to agree a rescue plan
Each has different costs, creditor approval thresholds and effects on directors and staff. A regulated insolvency practitioner will assess the company's accounts and prospects before recommending one.
When closure through liquidation is the right call
Sometimes the business itself is no longer viable, even with rescue tools available. In that case, an orderly closure is usually the better outcome for directors, creditors and staff alike, rather than trading on and adding to the debt.
The most common closure route for an insolvent company is a Creditors' Voluntary Liquidation (CVL), where directors choose to wind the company up and an insolvency practitioner is appointed as liquidator to realise assets and distribute proceeds to creditors. If directors don't act, and a creditor petitions the court instead, this can lead to a compulsory liquidation, which is generally more disruptive and public — the petition is advertised in The Gazette.
Liquidation formally closes the company, deals with remaining assets and liabilities, and gives directors a defined end point rather than an open-ended struggle.
How to choose between rescue and closure
The right route usually turns on a few honest questions:
- Is there a viable business underneath the debt, or has demand or the market genuinely moved on?
- Can creditors realistically be repaid a reasonable amount if trading continues?
- Is management capacity and cash available to see a rescue plan through?
- Would continuing to trade risk making the position worse for creditors?
A licensed insolvency practitioner can review the company's financial position and set out which options are genuinely open, rather than which sound best in theory. For a broader comparison of routes, Company Insolvency Options: Which Route Is Right? lays out the full range side by side.
What it means for you as a director
Directors of an insolvent company have specific legal duties, principally to act in the interests of creditors rather than shareholders once insolvency is likely. Continuing to trade while making the company's position worse — known as wrongful trading — can expose a director to personal liability, as gov.uk's guidance on liquidating a company explains, so getting proper input early matters.
Acting promptly, keeping clear records, and taking guidance from a regulated specialist all help protect a director's position, whatever route the company ultimately takes. Directors who engage early with a formal or informal process are generally viewed more favourably than those who let matters drift.
Frequently asked questions
Will I be personally liable for company debts?
Generally no, because a limited company is a separate legal entity. The main exceptions are personal guarantees you've signed, and situations involving wrongful or fraudulent trading, where a director's conduct is called into question.
Can I start a new company afterwards?
Yes, in most cases. Liquidation of one company doesn't automatically stop you being a director of another, though rules around reusing the same or a similar company name need care.
How long does the process take?
Informal negotiations can take weeks. A Creditors' Voluntary Liquidation typically takes a few months to complete, while administration or a CVA can run for a year or more depending on the rescue plan agreed.
What happens to my employees?
In a rescue process, jobs may be preserved if trading continues. In liquidation, employees are usually made redundant, though they may be able to claim certain amounts from the National Insurance Fund via the Insolvency Service.
Do I need to involve HMRC specifically?
Yes, if tax debts are part of the problem. HMRC is often a significant creditor and has its own processes, including Time to Pay arrangements, that should be factored into whichever route you choose.
This article is general information, not legal, financial or insolvency advice, and every company's situation is different. If you'd like to talk it through, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.