When a company is insolvent (it cannot pay its debts as they fall due, or its liabilities exceed its assets) you cannot simply walk away or strike it off. There are formal insolvency procedures, and as a director your legal duties shift to protecting creditors. This guide explains the main routes under the Insolvency Act 1986 in England and Wales.
First: take advice and protect creditors
Once a company is insolvent, or insolvency is probable (including where insolvent liquidation or administration is a real prospect), directors must prioritise the interests of creditors. This duty is not triggered by a merely remote or speculative risk of insolvency. Continuing to trade and run up debts can expose directors to personal liability for wrongful trading (Insolvency Act 1986, s 214), and other claims. The first step is almost always to consult a licensed insolvency practitioner.
The main procedures
Creditors' Voluntary Liquidation (CVL)
The most common route for an insolvent company that the directors decide to wind up. The shareholders pass a resolution to wind up, and the creditors appoint a liquidator (a licensed insolvency practitioner) who sells the assets and distributes the proceeds to creditors in the statutory order. The company is then dissolved.
Compulsory winding-up
A creditor (or the company, or others) petitions the court for a winding-up order, usually on the ground that the company is unable to pay its debts. The court appoints the Official Receiver/liquidator. This is often triggered by an unpaid statutory demand or an unsatisfied judgment.
Administration
Where there is a viable business or value to protect, the company can enter administration, with an administrator taking control. Administration provides a moratorium (breathing space) from creditor action, and aims to rescue the company or achieve a better result for creditors than immediate liquidation.
Company Voluntary Arrangement (CVA)
A CVA is a compromise with creditors, supervised by an insolvency practitioner, to pay all or part of the debts over time, allowing the company to continue trading if it is viable. A CVA, if approved, generally binds unsecured creditors entitled to vote, but it does not automatically bind secured or preferential creditors (such as banks with fixed charges or HMRC in a preferential capacity) unless they agree.
Which route?
- If the business can be rescued or sold as a going concern, administration or a CVA may be best.
- If the company should simply be wound up, a CVL (director-led) or compulsory liquidation (creditor-led) applies.
A licensed insolvency practitioner will advise on the right option.
Directors' responsibilities and risks
- Stop running up credit you cannot repay; don't prefer some creditors over others.
- Keep proper records and co-operate with any office-holder.
- Be aware of personal liability risks: wrongful trading, misfeasance, and liability under any personal guarantees.
Key takeaways
- An insolvent company must use a formal procedure, you cannot just strike it off.
- Main routes: Creditors' Voluntary Liquidation, compulsory winding-up, administration, and CVA (Insolvency Act 1986).
- Directors' duties shift to creditors; continuing to trade can mean personal liability for wrongful trading.
- Consult a licensed insolvency practitioner as soon as insolvency is in prospect.
Sources
- Insolvency Act 1986 (CVL, compulsory winding-up, administration, CVAs; wrongful trading s 214)
- The requirement to use a licensed insolvency practitioner
- Directors' duties to creditors when a company is insolvent or near-insolvent
--- This article is general information about the law of England & Wales as at 2026, not legal advice. Insolvency is high-risk for directors, consult a licensed insolvency practitioner and solicitor.