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At the point a company is unable to pay debts owed to creditors, it will be considered insolvent. At this juncture, creditors will seek to recover amounts owed to them by bringing court action. As a consequence, the company may be wound up and its assets liquidated in order to pay back its debts. Winding up refers to the process of bringing business affairs to an end in anticipation of liquidation, while liquidation is the selling off of company assets in order to satisfy creditor’s claims.

It is common practice for a company to appoint an insolvency practitioner who assists in the oversight of administration periods and subsequent liquidation proceedings. Although insolvency proceedings are geared towards the best outcome for creditors, there are protective measures for the company’s directors and shareholders.

Is there a definitive test for insolvency?

Generally, a company that either presently or will in future be incapable of meeting its debts and liabilities is considered insolvent. It will also be considered insolvent if the company’s asset value is less than the total value of debts and liabilities incurred by the company.

What are the means of having a company liquidated?

When a company becomes insolvent, there are three primary routes for having the company wound up and liquidation proceedings commenced.

  • If a creditor makes a formal demand for an amount exceeding £750 and it has not been satisfied within 3 weeks, or a court order for payment of debt to a creditor remains outstanding, that creditor may bring a petition to have the company wound up.
  • A company’s shareholders may pass a resolution to engage in voluntary winding up (Creditors’ Voluntary Liquidation).
  • A court may order the company to be wound up.


How are creditor’s claims satisfied?

In order to satisfy creditor’s claims, the most favourable routes for a company’s survival are to negotiate a Company Voluntary Arrangement (CVA) or complete the sale of the company as a going concern while in Administration. If the creditors’ claims cannot be met without saving the company, liquidation will follow.

Sale as a going concern and Company Voluntary Arrangements (CVAs)

Upon becoming insolvent, the common first step is for a company to enter administration. During a period of administration, the directors surrender control of the company to external, officially appointed administrators. One of the means of satisfying creditor’s claims is to have the company sold as a going concern on the open market, in order to free up cash.

A further arrangement that can be negotiated between the company and creditors is a Company Voluntary Arrangement (CVA). With a CVA, creditors may agree to a reduced or deferred debt payment plan, which will allow the company to continue operating.


Where a company cannot be rescued by means of sale as a going concern or CVA, it will be brought to an end and its assets realised for their cash value to be distributed to creditors. In terms of ordering of pay-outs, secured creditors take the highest priority, followed by expenses relating to the administration/liquidation process, including expenses relating to the administration or liquidation of the company. The lowest priority is unsecured creditors.

Creditors’ Voluntary Liquidation

Liquidation can be initiated voluntarily by a company’s shareholders when the company is insolvent, by passing a resolution for voluntary winding up. A liquidator will be appointed to dispose of the company’s assets.

Are there methods for asset recovery in the course of insolvency proceedings?

Upon declaring insolvency, certain transactions embarked upon by the company up to two years prior to the commencement of insolvency proceedings are reversible if considered necessary by the insolvency practitioner. Transactions will be reversible if: (1) the company was insolvent at the time, and (2) the asset sold for less than the market value.

Are there statutory limitations for creditors raising claims?

Statutory claims under contract, including debts, must be made within six years of the date of default. However, where a company has been judicially ordered to be wound up, or has entered voluntary liquidation, statutory limitations will cease to run. Court decisions have held that where an individual creditor submits a petition for winding up, the statute will cease to turn with regards their claim, but not other creditors who have yet to make such an order.

What are the potential implications for directors of a company in insolvency?

During an insolvency period, a director must place the interest of creditors ahead of all others, including shareholders. The directors must cooperate with an appointed liquidator, including provision of information, accounts, and authorise the transfer of assets to the liquidator. 

As a rule, whenever insolvency proceedings are instigated, the actions of all directors are subject to investigation. If a director resumes trading in violation of this duty and liquidation becomes inevitable as a result of their transactions, the director can be held personally liable for debts or subject to sanctions, including a ban from future directorship for up to 15 years.

Contact our Insolvency Litigation Solicitors in Mayfair and throughout London

Whether a company survives insolvency proceedings intact has significant financial consequences for shareholders and uncertainty for employees and directors. Furthermore, liquidation will mean the end of the company and any hard-fought brand image and market presence with it. As a result, it is important that best efforts are taken to preserve the integrity of the company and, if not possible, safeguard the interests of all three groups.

Lewis Nedas Law holds over 40 years of corporate litigation experience with both domestic and international clients in a broad range of matters, including insolvency proceedings. The firm has advised company directors in insolvency as to their duties and responsibilities, and how to avoid incurred personal liability or criminal sanction as a result of wrongful trading in liquidation.

For expert advice from our Dispute Resolution Solicitors, please call us on 020 7387 2032 or complete our online enquiry form.

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