UK Company insolvency FAQs

Abbas Panjwani

When is a company insolvent?

Under the Insolvency Act 1986 a company is insolvent when it has more liabilities than assets or is unable to pay its debts when they fall due. When a company becomes insolvent, it may need to enter an insolvency procedure. There are two broad types of insolvency procedure: those which allow the company to be rescued and those which are only concerned with selling the company’s assets to pay its creditors (those owed money), which is called liquidation.

Company directors are responsible for recognising when their company becomes insolvent, and they can be held legally responsible for continuing to trade whilst insolvent.

Company directors can enter the company into insolvency procedures, but creditors (those owed money by the company) can also apply to the court to force a company to enter an insolvency procedure.

What is administration?

Administration is an insolvency procedure where an independent insolvency professional, acting as an administrator, takes over management of the insolvent company. The administrator has legal objectives to attempt to rescue the company as a viable business and to seek the best return for the company’s creditors.

When a company enters administration, a statutory moratorium automatically applies. This prevents individual creditors from taking legal action against the company and halts ongoing legal action. This allows the administrator breathing space to perform their duties. Without the moratorium, individual creditors could, say, claim the money they were owed by the company, to the detriment of creditors as a whole.

Administration can end with the company returned to solvency, usually through the renegotiation of company debts with creditors, known as restructuring. Normally, most creditors must agree to the restructuring plan which tends to include writing off some company debts in order to re-structure the company as a viable business. Where the administrator is unable to salvage the business, administration can end in the liquidation, or winding up, of the company.

For more information about administration, see the Library briefing Insolvency: Company administration.

What is liquidation?

Liquidating a company (also known as winding up a company) is a procedure where a company’s assets are sold to pay the company’s debts. Solvent companies which can fully pay their creditors can be liquidated through a procedure called a members’ voluntary liquidation. There are two types of liquidation for insolvent companies:

Creditors’ Voluntary Liquidation (CVL). This happens when the members (shareholders) vote by a 75% majority to close the company down; and
Compulsory liquidation. This is when a court orders that the company be closed down and appoints a liquidator. Unlike a CVL, shareholder consent is not required and court proceedings are usually initiated by a creditor.

An independent liquidator sells the remaining assets of the insolvent company and distributes them to creditors (those owed money by the company) according to a strict legal order. For more information about liquidation, see the Library briefing Insolvency: Company liquidation.

How do I get money owed back from an insolvent company?

Individuals might be owed money by an insolvent company for a number of reasons including:

They bought goods and services from the company which haven’t been delivered.
They worked for the company and are owed wages or money awarded by employment tribunals.
They loaned money to the company.

Those owed money can register as a creditor with the person or organisation managing the insolvency, such as the administrator or liquidator.

Details of who is managing the insolvency can be found on the company’s page on the company register; they will also publish regular updates on the progress of the administration or liquidation to the register. Alternatively, individuals can identify the insolvency practitioner by searching the insolvency notices of the Gazette, the official public record.

Employees of insolvent companies can apply to the Insolvency Service to have the government cover some debts they are owed by the company including unpaid wages and some, but not all, tribunal awards. However, not all debts are covered, and there is a cap on how much employees can claim. For further information see the government’s guidance.

Will I get my money back from the company?

When a company’s assets are sold to pay creditors, creditors must be paid, by law, in order according to a “hierarchy of creditors”. So, if the company doesn’t have enough money to pay all its debts, low-ranking creditors may not receive any return.

Payments must be made to the following classes of creditors in order:

Secured creditors with a fixed charge (creditors with security over a specific asset such as a bank with a mortgage)
Insolvency practitioners’ fees and expenses
Preferential creditors (such as employee salaries and pension contributions)
Secondary preferential creditors (including certain HMRC debts)
Prescribed part creditors (the Enterprise Act 2002 created a guarantee for unsecured creditors to receive a proportion of the distribution to certain secured creditors)
Secured creditors with a floating charge (creditors with security over the company’s general pool of assets, rather than a specific asset)
Non-preferential creditors (unsecured creditors such as suppliers owed payment, or customers owed refunds)
Shareholders

The company which owes me money behaved dishonestly. How is this investigated or reported?

Sometimes people owed money by an insolvent company may feel that the company was run into insolvency dishonestly and to their detriment; for example, that directors asset-stripped the company (say, by paying themselves unusually high salaries), prior to putting the company into insolvency proceedings.

The Insolvency Act 1986 includes various provisions to stop this happening or rectify it if it does happen. For example, if a court finds a director acted with the intent to defraud creditors (section 213) it can order a director’s personal assets can be used to pay creditors, not just the company’s own assets.

When a company is in administration or liquidation, the independent insolvency practitioner must prepare a report about the conduct of the company’s directors for the Insolvency Service. The Insolvency Service can then investigate directors and may seek to disqualify them from being directors in future.

The insolvency practitioner themselves can take legal action against directors (say to try and claim some of the director’s personal assets to pay creditors) if they think this is in the best interests of creditors.

Individuals who believe a director may have behaved improperly in the run-up to an insolvency can report their concerns to the company’s insolvency practitioner and the Insolvency Service.

If someone is unhappy with how an insolvency practitioner has dealt with their allegations, they can complain following the guidance published by the Insolvency Service. If they’re unhappy with the Insolvency Service itself, they can follow the Insolvency Service’s own complaints procedure.

Can I claim back money I’m owed by an insolvent company from my credit card provider?

If someone is owed something they’ve paid for from an insolvent company, they may be able to get a refund from their credit provider.

Section 75 of the Consumer Credit Act 1974 means that when a consumer buys something with credit, the credit provider and the supplier of those goods and services are jointly liable. This applies to purchases between £100 and £30,000.

If a supplier enters insolvency, the customer may be unable to claim a full, or timely refund, from the supplier, but they may be able to claim a full refund from the credit provider.