You should refer a client to an insolvency practitioner as soon as their company shows genuine signs of cash-flow or balance-sheet insolvency — not after a winding-up petition lands. Waiting until creditors act removes options and increases director risk. Knowing when to refer to an insolvency practitioner is a core part of good client care for solicitors and accountants handling distressed businesses.
This guide sets out the practical triggers, the duties you carry as a referrer, and how to make a clean, well-documented handover to a regulated specialist without overstepping into advice you're not licensed to give.
Cash-flow and balance-sheet insolvency in practice
A company is insolvent in two distinct ways under UK law, and either is enough to justify a referral conversation.
- Cash-flow insolvency — the company cannot pay its debts as they fall due, even if its assets exceed its liabilities on paper.
- Balance-sheet insolvency — total liabilities exceed total assets, even if the company is currently meeting its day-to-day payments.
Either test can trigger director duties under the Insolvency Act 1986. Clients rarely describe their position in these terms — they talk about missed supplier payments, mounting HMRC arrears or a bank that's stopped extending credit. Learning to translate that language into the two insolvency tests is the first step in spotting the signs a company is insolvent.
In practice, most distressed companies show both types of insolvency at once, just at different stages. Cash-flow pressure usually appears first, as invoices slip and payment terms are stretched with suppliers. Balance-sheet insolvency often only becomes clear once the accountant prepares management accounts or year-end figures. A referral doesn't need to wait for a formal balance-sheet test — persistent cash-flow strain, on its own, is a legitimate reason to bring in a specialist.
Red flags that should prompt a referral
Some signals are clear enough that they should prompt you to refer a client to an IP straight away, rather than continuing to advise around the edges of the problem.
- Persistent HMRC arrears, especially PAYE, VAT or a broken Time to Pay arrangement.
- A statutory demand received, or informal threats of a winding-up petition.
- Repeated use of one creditor's money to pay another (robbing Peter to pay Paul).
- Directors taking on new credit or new contracts while existing debts go unpaid.
- Wages, rent or supplier invoices consistently paid late or in part.
- Bank facilities withdrawn, reduced or declined to renew.
- The company's accountant flagging a negative balance sheet at the last set of accounts.
These are also wrongful trading warning signs. Once a director knew, or ought to have concluded, that insolvent liquidation was unavoidable, continuing to trade without minimising creditor loss can expose them personally under section 214 of the Insolvency Act 1986 provisions on wrongful trading. A referral at this stage protects the director as much as the creditors.
Why early referral protects the director and you
An early, well-timed referral does two things at once: it gives the director access to proper insolvency options, and it protects your own position as the referring professional.
If you're a solicitor, there's a recognised solicitor duty to an insolvent client — to recognise when a matter has moved beyond your competence or regulatory remit and to signpost the client to someone qualified to advise on insolvency. Continuing to give general commercial advice to a company that is, in substance, insolvent can leave both the director and the referrer exposed if things later go wrong.
Early referral typically preserves more options too, including:
- A company voluntary arrangement to restructure debt while trading continues.
- Pre-pack or trading administration, where the business (not just the company) can be preserved.
- An orderly members' voluntary liquidation, if the company is solvent but winding down.
- A negotiated exit that reduces the risk of a contested winding-up petition.
Wait until a petition is advertised in insolvency notices in The Gazette and most of these routes have already narrowed or closed. That's a matter of public record: once advertised, banks, credit insurers and suppliers can see it, and confidence tends to fall away quickly.
What you can and cannot advise on yourself
Solicitors and accountants can, and should, keep advising within their own competence — contract disputes, tax computations, employment matters, general commercial guidance. What you cannot do, unless separately licensed and insured for it, is advise on formal insolvency options themselves, such as which company liquidation process suits the business or what a director's personal exposure looks like in detail.
That line matters for regulatory and professional indemnity reasons, and it's covered in more depth in our guide to Introducers vs Advisers: Where's the Line?. As an introducer, Harbourfirst sits on the same side of that line as you: we connect clients with regulated insolvency practitioners and solicitors, but we don't advise on their case ourselves.
Making a warm, well-documented handover
A "warm handover" means the client reaches the insolvency practitioner with context already in place, rather than starting from a blank page under pressure.
How you introduce the referral matters too. Directors are often anxious about what an insolvency practitioner appointment means for them personally, and for their employees. A calm, factual framing — this is a specialist who can set out the options properly — tends to get a far better response than treating the referral as a last resort.
- Summarise the position in writing: key dates, creditor names, HMRC status and any correspondence already received.
- Flag urgency accurately — a received statutory demand is not the same as a general cash-flow worry.
- Check whether professional clearance is needed before another firm takes on the appointment; our note on Professional Clearance for IP Appointments explains when this applies.
- Be transparent with the client about how the referral works, including any commercial relationship involved in making it.
If a referral fee arrangement is part of how you work with an introducer or panel firm, it's worth confirming the position is compliant before relying on it — see Are Referral Fees Legal in the UK? for the current rules.
Frequently asked questions
What happens after a winding-up petition is issued?
A winding-up petition is typically advertised in The Gazette around seven business days after service, which can freeze the company's bank account. Once advertised, the company's options narrow sharply, and the court will usually consider the petition at a scheduled hearing unless it's withdrawn or settled beforehand. Referral before this stage is strongly preferable.
Does HMRC arrears alone mean a company needs an insolvency practitioner?
Not automatically. Many companies manage HMRC arrears through a Time to Pay arrangement. But repeated broken arrangements, mounting PAYE or VAT debt, or HMRC threatening enforcement are all reasons to bring in a regulated specialist promptly.
Should I refer a client before or after they've missed a payment deadline?
Before, wherever possible. A referral made while the company still has trading options and cash in hand gives the insolvency practitioner far more to work with than one made after enforcement action has started.
What about a director's personal guarantees?
Personal guarantees can survive a company's insolvency and remain the director's personal liability, separately from anything owed by the company itself. This is exactly the kind of question a regulated insolvency practitioner or solicitor should assess directly with the director, rather than something to estimate informally.
Can I stay involved in the case after referring the client?
Usually, yes, within your own area of expertise. A referral hands over the insolvency decision-making; it doesn't require you to step away from unrelated legal or accountancy work you're already doing for the client.
This article is general information, not legal, financial or insolvency advice, and it doesn't replace a proper assessment of any individual company's circumstances. Directors and their advisers should speak to a regulated specialist about their own position.
If a client's position matches any of the signs above, Harbourfirst can introduce them to a regulated insolvency practitioner or solicitor for a proper assessment — start an enquiry.