What Is Company Insolvency?
Company insolvency occurs when a business cannot pay its debts as they fall due (cash flow insolvency) or when its liabilities exceed its assets (balance sheet insolvency). UK insolvency law, primarily the Insolvency Act 1986 (as amended by the Corporate Insolvency and Governance Act 2020), provides several formal procedures depending on the company's circumstances and whether rescue is viable.
Directors have a legal duty to act in the best interests of creditors once they know (or ought to know) that insolvency is unavoidable. Continuing to trade while insolvent — known as wrongful trading — can result in personal liability for directors under Section 214 of the Insolvency Act.
Insolvency Procedures Compared
| Procedure | Purpose | Who Initiates | Company Continues? | Typical Duration |
|---|---|---|---|---|
| Administration | Rescue or better outcome | Directors, creditors, or court | Yes, under administrator control | 12 months (extendable) |
| CVL (Creditors' Voluntary Liquidation) | Wind up insolvent company | Directors and shareholders | No — assets sold to pay creditors | 12-24 months |
| MVL (Members' Voluntary Liquidation) | Close solvent company | Directors (company must be solvent) | No — tax-efficient closure | 6-12 months |
| Compulsory Liquidation | Court-ordered winding up | Creditors (petition to court) | No — official receiver takes control | 12-36 months |
| CVA (Company Voluntary Arrangement) | Restructure debts | Directors (with insolvency practitioner) | Yes — continues trading | 3-5 years |
| Receivership | Recover secured debt | Secured creditor (e.g., bank) | Partially — receiver controls charged assets | Varies |
Administration
Administration is a rescue procedure where an insolvency practitioner (the administrator) takes control of the company. The administrator must pursue one of three statutory objectives in order: rescuing the company as a going concern, achieving a better result for creditors than immediate liquidation, or realising assets to make a distribution to secured or preferential creditors.
Administration provides a moratorium — creditors cannot take legal action against the company during the process. This breathing space allows the administrator to assess the business, negotiate with creditors, and attempt a restructuring or sale. Pre-pack administration, where a sale is arranged before the administrator is formally appointed, remains controversial but can preserve jobs and business value.
Liquidation (Winding Up)
Liquidation is the terminal procedure for closing a company and distributing its assets. A Members' Voluntary Liquidation (MVL) is used when the company is solvent but directors wish to close it — often for tax efficiency when extracting retained profits. A Creditors' Voluntary Liquidation (CVL) is initiated when the company cannot pay its debts.
Compulsory liquidation is ordered by the court, typically following a winding-up petition from a creditor owed at least £750. The petition is published in The London Gazette, giving 7 days for the company to respond. Once a winding-up order is made, the official receiver takes control and a licensed insolvency practitioner may be appointed as liquidator.
CVA (Company Voluntary Arrangement)
A Company Voluntary Arrangement allows a company to reach a binding agreement with its creditors to pay debts over time while continuing to trade. CVAs require approval from 75% of creditors by value. They have been widely used by retail and hospitality chains (such as Debenhams and Pizza Express) to restructure lease obligations across multiple locations.
The CVA proposal is prepared by an insolvency practitioner acting as nominee, and if approved, they become the supervisor monitoring compliance. If the company fails to meet its CVA obligations, creditors can petition for winding up.
Creditor Priority in Insolvency
When a company enters liquidation, its assets are distributed in a strict statutory order: fixed charge holders first, then the costs of the insolvency process, preferential creditors (employees' wages up to £800 and pension contributions), the prescribed part fund (ring-fenced from floating charge realisations for unsecured creditors, capped at £800,000), floating charge holders, unsecured creditors, and finally shareholders.
Unsecured creditors — including most trade suppliers and HMRC for non-preferential debts — typically receive very little. Recovery rates average just 5-10p in the pound. Since December 2020, certain HMRC debts (VAT, PAYE, employee NICs) have been reclassified as preferential, further reducing returns to unsecured creditors.
How UVAGATRON Tracks Insolvency
UVAGATRON monitors insolvency signals across multiple sources: Companies House status changes, London and Edinburgh Gazette notices (winding-up petitions, appointments of administrators and liquidators), and court filings. Director network analysis identifies individuals connected to multiple insolvent companies — a pattern that may indicate serial misconduct or legitimate serial entrepreneurship.