A Guide to Spotting the Signs of Insolvency in Your Company

July 20, 2022 / Business Insolvency

The threat of insolvency is a state that many companies need to deal with at some point. This could be due to declining profitability, the loss of a major client, unforeseen circumstances or many other reasons, and it can take a company by surprise.

In this article, Clarke Bell will discuss how you can spot the warning signs of insolvency in your company, what you can do to address it, and the consequences of mis-handling insolvency. With this information, you can not only better protect your company, but also yourself.

The duties of a company director

As a company director, you need to be aware of your legal responsibilities. You should take care to keep your records updated, sending your company accounts and confirmation statements to Companies House once they are due. You must also act responsibly, uphold your obligations to creditors, and work to the benefit of your company.

If you perform these duties, yet have not been officially appointed as a director, the law will still see you as such. It is crucial you know where you stand, and have a solid grasp of your duties as a director. If your company becomes insolvent, your adherence to these responsibilities will be scrutinised, which will influence whether insolvency proceedings will impact you personally.

Benchmarks for insolvency

Directors have two simple and straightforward tools to predict future insolvency for their company. These tools are the same ones used by the Insolvency Service to examine insolvent companies and their directors. As such, directors can use them to great effect. These tools are:

Cash flow test

The first test directors can use is a cash flow test. This test can be used to predict imminent insolvency, measuring the company’s ability to pay its liabilities in the immediate future. Given the immediate nature of this test, a company that fails this test is not likely to remedy its financial position. Liquidation is one solution, with a Creditors’ Voluntary Liquidation (CVL) normally being the best option for insolvent companies.

While the test can be more in-depth, there are a number of surface indicators for imminent insolvency. Late payments to suppliers are one indicator, especially if you receive several letters demanding payment. If your company has its suppliers halting trade due to lack of repayment, that is a clear warning sign. Late payments to creditors are another sign, as is tax arrears with HMRC.

Balance sheet test

A balance sheet test is a more long-term and rigorous test for potential upcoming insolvency. It measures a company’s assets against its liabilities, determining whether the company can make its payments. If the company’s liabilities exceed its assets, it is considered balance sheet insolvent.

Unlike a cash flow test, a balance sheet test can be used to measure well into the future. Naturally, the more distant the future, the less accurate the test, impacting its usefulness. That said, it can be an excellent tool to help you examine your company’s financial state over the coming months, giving you time to course-correct if need be.

Change in duties for directors of insolvent companies

If you find your company may become insolvent as a result of the previous tests, you must change how you carry out your duties as a director. Whereas directors of solvent companies must act in the company’s best interests, directors of insolvent companies must put the needs of creditors first.

Whether you decide to liquidate your company or attempt to continue trading, these new duties must be carried out. If you opt for liquidation, proceeds of the procedure (if there are any) must go to your creditors. Anything remaining can be distributed amongst shareholders. If you intend to keep trading while insolvency is a possibility, you must do so with the best interests of your creditors in mind. If a solution to your company’s financial problems cannot be found quickly, you will likely have to turn to liquidation to fulfill these obligations. Continuing to trade while insolvent is a form of wrongful trading, and can see you held personally liable for company debts.

Consequences of insolvency

If your company becomes insolvent, your handling of the situation will determine what consequences you face, if any. Mis-handling the situation could result in severe penalties being brought against you. As such, it’s vital to know what can trigger these penalties and how you can avoid them.


Part of the CVL procedure involves an investigation into the company and its directors. In most cases, this does not result in anything unfavourable. However, if the liquidator (also known as the Insolvency Practitioner) does discover anything suspicious, it will be reported to the Insolvency Service.

If your company is forced into a compulsory liquidation before you can enact voluntary measures, a thorough investigation into director conduct will be an early part of the procedure. Similarly, an investigation will be conducted as part of a company’s dissolution. Lastly, the Insolvency Service can investigate companies that have been accused of misconduct or abuse. Depending on what is found, and to what severity, directors can expect a series of consequences.


Following an investigation, sparked either by insolvency or suspicions of misconduct, directors may be subject to certain penalties, including directors being disqualified from their position for a period of up to 15 years. This disqualification includes other companies and other management positions. Failing to comply with this disqualification can see directors receive an extended disqualification and possibly even criminal prosecution. Disqualification also prohibits directors from appointing someone to act instead of them, but under their instruction. If a director is found to have done so, the previous penalties can apply. Information regarding this disqualification, including why it was imposed, will be published by Companies House. This can have the secondary consequence of tarnishing a director’s reputation or that of an entire organisation.

While disqualification is one of the most impactful consequences, it isn’t the only one. Depending on the extent and nature of the misconduct, directors may be held liable for company debts. This means that, regardless of whether a personal guarantee was signed, a director must repay their company’s creditors out of their personal finances. This may accompany fines, and even a prison sentence.

What you can do to handle insolvency

If your company is insolvent, don’t despair – you have a few options at your disposal. Most importantly, you should seek the advice of a licensed insolvency practitioner. They will be able to give you the best advice for your particular situation…which could be to place your company into a Creditors’ Voluntary Liquidation.

A CVL is often the best solution for an insolvent company, as it offers an efficient method of liquidating a company, while still upholding your obligations as a director. Additionally, your company will be protected from legal action, as will your personal finances, unless you have signed a personal guarantee as part of a loan agreement. The procedure will be carried out by a licensed insolvency practitioner, who will ensure that your company is liquidated properly and in accordance with the law.

For more information about a CVL, read our complete guide on the process.

Let Clarke Bell help you

Searching for a solution as the director of an insolvent company can be a difficult task. However, it is not one you need to handle alone.

Clarke Bell can help you find the best solution for your company, be that a Creditors’ Voluntary Liquidation or otherwise. We have over 28 years of experience in doing exactly this for companies, and we can do the same for you.

Contact our team today for a free, no-obligation consultation, and find out what we can do for you.