UK insolvency laws exist to deal with one situation: a company that can no longer meet its financial obligations.
They set out how insolvency is identified, how directors are expected to act once financial problems become clear and the formal routes available to deal with company debt in a controlled way.
For directors, these laws are less about punishment and more about structure. They provide a legal framework that explains when decisions need to change and how to bring a difficult situation to a proper conclusion.
Where UK insolvency law comes from
Most company insolvency in the UK is governed by a small number of core legal sources. Together, these rules form the framework used whenever a company cannot pay its debts.
The Insolvency Act 1986 sets out the legal definition of insolvency, the main insolvency procedures and the powers of insolvency practitioners.
The Companies Act 2006 covers how companies are run and the general duties of directors. Those duties continue to apply when a company is in trouble, but their focus changes as insolvency approaches.
The Insolvency Rules 2016 provide the practical detail. They govern how insolvency processes are carried out day to day, including notices, reporting and creditor communication.
How insolvency is defined in practice
UK law uses two tests to decide whether a company is insolvent. Either one is enough on its own.
Cash-flow insolvency
A company is cash-flow insolvent when it cannot pay its debts as they fall due. In practice, cash-flow insolvency often shows up as missed tax payments, supplier arrears or constant juggling to keep the most urgent bills paid. Even if money is expected in the future, the company is insolvent if it cannot meet its obligations on time.
Balance-sheet insolvency
A company is balance-sheet insolvent when its liabilities are greater than the realistic value of its assets.
This is based on what assets would actually sell for, not what they appear to be worth in the accounts. For many directors, balance-sheet insolvency becomes clear only when debts are listed out properly and asset values are reviewed realistically.
Failing either test means the company is insolvent according to UK insolvency law.
How your responsibilities change once insolvency is likely
One of the most important parts of UK insolvency law is how it changes a director’s position.
While a company is solvent, directors focus on maximising profits for shareholders. Once insolvency is likely, the emphasis shifts towards protecting the interests of creditors.
In practical terms, this means decisions should be taken with care. Directors are expected to avoid allowing losses to creditors to increase, preserve company assets and keep accurate records of what the business is doing.
The law is concerned with how decisions are made once insolvency becomes clear, rather than with the fact that the business has failed.
The formal insolvency options under UK law
UK insolvency law provides several regulated processes, depending on whether the business can recover or needs to close.
Company Voluntary Arrangement (CVA)
A CVA allows a company to restructure unsecured debts into an agreed repayment plan while continuing to trade. It’s only suitable where the underlying business still works and creditor support can be obtained.
Administration
Administration places the company under the control of an insolvency practitioner and introduces legal protection from creditor action. This gives time to assess whether the business can be rescued, sold or closed in an orderly way.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation is used when a company is insolvent and cannot be saved. The business is closed properly, assets are realised and debts are dealt with under the statutory order.
Compulsory Liquidation
Compulsory Liquidation follows a court order, often after a creditor petition. Control passes away from directors and the process is overseen by the Official Receiver or a court-appointed liquidator.
Each option is governed by legislation and follows a strict legal framework.
How creditors are dealt with under insolvency law
UK insolvency law sets out a fixed order for paying creditors from any money realised. Broadly, the order is:
- Fixed-charge secured creditors
- Costs and expenses of the liquidation
- Preferential creditors (certain employee claims and some HMRC claims)
- The prescribed part
- Floating-charge secured creditors
- Unsecured creditors
- Shareholders
This order cannot be changed. It explains why some debts are paid and others are written off once insolvency begins.
The role of HMRC and the Insolvency Service
HMRC is often a major creditor when a company becomes insolvent. Its position in the payment order is set by law, with some taxes treated as preferential and others as unsecured.
The Insolvency Service oversees the system, regulates insolvency practitioners and reviews director conduct in insolvent cases. Director reviews are routine and form part of the statutory process.
Why timing matters
UK insolvency law places real weight on timing. Recognising insolvency early and acting within the legal framework usually preserves control and limits risk. Delay often allows creditor pressure to escalate and reduces the choices available.
The law is designed to encourage early, structured decisions rather than last-minute reactions.
Key takeaways
- UK insolvency laws govern how company debt is dealt with when a business can’t pay
- Insolvency is defined by cash-flow or balance-sheet failure
- Directors’ responsibilities change once insolvency is likely
- Several formal processes exist, depending on whether recovery is realistic
- Creditor payments follow a fixed legal order
- Early advice usually gives more control over the outcome
Get advice on where you stand
If you’re unsure whether your company is insolvent or how the law applies to your situation, getting clarity early can make decisions feel more manageable.
A short conversation with a qualified insolvency practitioner will confirm your position, explain how your duties apply in practice and outline the options available before matters escalate further.
