What is cash-flow insolvency?

Cash-flow insolvency is one of the two legal tests used in the UK to determine whether a company is insolvent. It describes the point where your business cannot pay bills on time, even if the company still has assets on paper.

For many directors, this is the first sign the business is in real trouble. You may have been juggling payments for months, waiting for that one big invoice to land, or delaying supplier bills to keep wages paid. Those decisions feel practical in the moment but often signal that the business is already cash-flow insolvent.

Understanding this test matters because it shapes your duties as a director and guides whether the business can continue trading safely. The other test is balance-sheet insolvency, where liabilities outweigh assets. Both tests sit side by side, and either one confirms insolvency.

What cash-flow insolvency means in practice

The cash-flow test looks at one simple question: can the company pay its debts on time and in full? You may be cash-flow insolvent if:

• You can’t pay VAT
• You can’t pay PAYE
• You rely on future income to pay today’s liabilities
• Suppliers are pushing for payment or placing you on pro-forma terms
• You’re using credit cards, loans or overdrafts to plug routine cash flow gaps
• You’re constantly prioritising some creditors over others just to get through the month

This test focuses on timing rather than totals. You might have assets, stock or slow-paying invoices but if they can’t be converted to cash quickly enough to meet liabilities, you still fail the cash-flow test.

How cash-flow insolvency develops

Cash-flow strain rarely appears overnight. It usually builds in stages:

• A single late payment, perhaps a VAT bill you hoped to clear next month
• Short-term juggling and paying critical suppliers first and everything else late
• Growing arrears like HMRC, rent and utilities becoming harder to manage
• Creditor pressure through letters, calls or threats of enforcement
• No clear way to catch up, even if income improves

Many directors describe this period as firefighting. You’re working flat out to keep the business moving but your cash position keeps slipping backwards. That’s when early advice becomes essential.

Your duties once cash-flow insolvency appears

UK insolvency law requires directors to act in the best interests of creditors once they know, or ought to know, that the company is insolvent. It means you must avoid allowing the position to worsen. Continuing to trade without a plan could expose you to claims of wrongful trading, especially if new debts are taken on that can’t be repaid.

Being cash-flow insolvent isn’t a failure of character. It’s a financial state based on the numbers. What matters is how you act once the warning signs become clear.

Your options if your business is cash-flow insolvent

Once cash-flow insolvency becomes apparent, you have several regulated routes available. These are handled by licensed insolvency practitioners and include:

Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement may be suitable if the business can recover with breathing space. It restructures unsecured debts into a single affordable payment while you carry on trading.

Administration
Administration gives the company immediate legal protection through a statutory moratorium. It’s often used when jobs, assets or key contracts need safeguarding.

Creditors’ Voluntary Liquidation (CVL)
If the company can’t recover, a Creditors’ Voluntary Liquidation lets you close the business properly. Unsecured debts are written off unless misconduct is found, and directors meet their legal duties.

A Time to Pay arrangement
If HMRC arrears are the main pressure and the underlying business is otherwise sound, a Time to Pay arrangement could help spread repayments. But if wider debts exist, this may only delay the inevitable.

How cash-flow and balance-sheet insolvency link together

Cash-flow insolvency often appears before balance-sheet insolvency. You may still have assets that outweigh liabilities but the day-to-day cash position is too tight to continue trading safely. That’s why both tests exist, and why it’s worth understanding the companion concept: balance-sheet insolvency.

Key takeaways: What is cash-flow insolvency?

• Cash-flow insolvency means your company can’t pay debts when they fall due
• It’s one of the two legal tests used to confirm insolvency
• Warning signs include HMRC arrears, supplier pressure and continuous payment juggling
• Once insolvent, director duties shift towards protecting creditors
• Restructuring or liquidation options exist, depending on viability

Get advice on cash-flow insolvency

If cash flow has started slipping or you’re paying one creditor while delaying another, now is the moment to get clarity. Cash-flow insolvency doesn’t mean the end of the road. But the longer it continues without a plan, the narrower your options become. 

A short call with a qualified insolvency practitioner can give you a realistic picture of where your business stands and whether there’s a route to steady things. We’ll look at your cash commitments, upcoming liabilities, HMRC position and any creditor pressure, then talk you through the regulated options that protect you as a director. 

Get in touch for free, confidential advice and take back control before the pressure escalates.