Commercial insolvency: what it means for your business and how to respond

Commercial insolvency is when a company can't pay its debts as they fall due, or when its liabilities are greater than its assets. It doesn't always mean the company has to close, but once a company is insolvent, or close to it, its directors must take creditors' interests into account and should get professional advice about what to do next. Around one in 200 companies in England and Wales entered insolvency in the 12 months to September 2026, according to the Insolvency Service. That makes it a risk worth understanding, whether you're concerned about your own business or a customer you rely on.

This guide covers how insolvency is defined, what causes it, the warning signs to look out for, your duties as a director, the formal procedures available and how creditors are repaid. It also explains how a customer or supplier's insolvency can affect your business, and how to spot the signs early.

What is commercial insolvency?

Commercial insolvency, also known as company or corporate insolvency, is when a limited company can no longer meet its financial obligations. Under the Insolvency Act 1986, a company is insolvent if it fails either of two tests:

• The cash flow test looks at whether the company can pay its debts as they fall due.

• The balance sheet test looks at whether the company's liabilities, including those that may fall due in future, are greater than its assets.

A company only needs to fail one of these tests to be insolvent. For example, a business might own valuable equipment, so its assets are worth more than its liabilities, but still not have the cash to pay this month's suppliers. Insolvency describes a company's financial position rather than a formal process. Liquidation is one possible outcome, where the company stops trading and a liquidator sells its assets to repay creditors. Other formal procedures, such as administration or a company voluntary arrangement (CVA), aim to rescue the business instead, although liquidation is far more common. When an individual or sole trader can't pay their debts, this is known as personal insolvency, such as bankruptcy, rather than commercial insolvency.

How common is commercial insolvency in the UK?

There were 1,882 company insolvencies in England and Wales in September 2026, 5% fewer than in September 2025, according to the Insolvency Service. The large majority of these ended in liquidation, with 1,420 creditors' voluntary liquidations and 341 compulsory liquidations, compared with 102 administrations and 19 CVAs. Some sectors are affected far more than others. Construction recorded the most insolvencies in the 12 months to September 2026, accounting for 17% of cases where the industry was recorded.

What causes commercial insolvency?

Commercial insolvency is caused by a company not having enough cash to pay its debts when they're due, or by its liabilities growing larger than its assets. Several pressures can lead a business to that point:

• Customers paying late. When customers take longer to pay, you still have to pay your own suppliers, staff and HMRC on time.

• A major customer becoming insolvent. Once insolvency proceedings begin, outstanding invoices are often paid late or not at all.

• Growing faster than your cash can support, known as overtrading. Each new order can mean paying for staff, materials or stock upfront, often weeks before your customer pays you.

• Large one off payments. A big tax bill or loan repayment can take a significant amount of cash out of the business at once.

• Spending more than the business earns. Over time, this will drain the company's cash reserves.

Being profitable doesn't protect a business from insolvency. Profit shows whether you earn more than you spend over a period, while cash flow shows whether you have the money to pay your bills on the day they're due. That timing gap is why a profitable business can still run out of cash and fail the cash flow test.

What are the early warning signs of insolvency in your own business?

Early warning signs of insolvency include a constantly stretched overdraft, paying suppliers late, customers taking longer to pay and a falling business credit score. These are all signs that cash is running short, and spotting them early gives you more time to act:

• Your overdraft is regularly at its limit, or keeps growing instead of rising and falling with your normal trading cycle.

• You're paying suppliers later than agreed, or choosing which bills to pay first.

• Customers are taking longer to pay, and the total you're owed keeps going up.

• Your business credit score is falling because of late payments. Lenders, suppliers and clients use your score to judge how financially reliable your business is, so a falling score can make it harder to secure finance or credit terms just when you need them.

• You've received a County Court Judgment (CCJ) or a statutory demand.

A statutory demand needs urgent attention. It's a formal demand for payment, and if the debt is more than £750 and the company doesn't pay, secure or settle it within three weeks, the creditor can petition the court to wind the company up. A CCJ also damages your business credit score and can make borrowing harder and more expensive, as our guide on how a CCJ affects your business explains. If you recognise several of these signs, it's worth reviewing your cash flow forecast and taking professional advice as early as possible.

What are your duties as a director if your company is insolvent?

If your company is insolvent, or close to it, you must take creditors' interests into account alongside shareholders', and the worse the company's financial position, the more weight creditors' interests carry. Once insolvent liquidation or administration can't be avoided, shareholders' interests no longer come into it. Directors who don't meet these duties can be held personally responsible:

• If you keep trading when you knew, or ought to have concluded, that insolvent liquidation or administration couldn't be avoided, the court can order you to contribute to the company's assets personally. This is known as wrongful trading, and the defence is showing you took every step you should have to minimise creditors' losses.

• Fraudulent trading, where a business is carried on with intent to defraud creditors, is a criminal offence.

• You can be disqualified as a director for up to 15 years, for example for allowing the company to keep trading when it can't pay its debts or for not paying tax it owes.

• If you've signed a personal guarantee, the lender can pursue you personally for the debt if the business defaults.

A liquidator or administrator can also ask the court to reverse certain transactions made before the insolvency, such as selling company assets for significantly less than they're worth, or deliberately putting one creditor in a better position than the others. If you think your company may be insolvent, take advice from a licensed insolvency practitioner or a solicitor before making decisions about trading, paying creditors or selling assets.

Which formal insolvency procedures are available to a UK company?

The formal procedures available to an insolvent UK company are a moratorium, a company voluntary arrangement (CVA), a restructuring plan, administration, a creditors' voluntary liquidation (CVL) and compulsory liquidation. The first four can help rescue the business, while the two types of liquidation close it down. Before using a formal procedure, you can try to agree new payment terms informally with your creditors. An informal agreement isn't legally binding, though, so a creditor can withdraw from it at any time. Most formal procedures are run or overseen by a licensed insolvency practitioner.

A moratorium gives the company an initial 20 business days of protection from most creditor and legal action while it works on a rescue. A CVA needs approval from creditors holding at least 75% of the debt that votes, and lets the company repay what it owes over time while it keeps trading. In administration, a licensed insolvency practitioner takes control of the company, and creditors can't take legal action without the administrator's consent or the court's permission. If the business can't be rescued, a CVL is the most common route. The alternative is compulsory liquidation, where a creditor petitions the court to wind the company up. Once the winding up petition is filed, the company's bank account is frozen, which can make it very difficult to keep paying staff and suppliers.

What happens to creditors when a company becomes insolvent?

When a company becomes insolvent and its assets are sold, creditors are repaid in a fixed order set by law, and each group is only paid once those above it have been paid in full. Unsecured creditors, such as trade suppliers, sit near the bottom of that order, so they can lose some or all of what they're owed. The order of priority is:

1. Secured creditors with a fixed charge over specific assets, such as property or equipment.

2. The insolvency practitioner's fees and expenses.

3. Preferential creditors, mainly employees owed wages, holiday pay and pension contributions, up to set limits.

4. Secondary preferential creditors, which is HM Revenue and Customs (HMRC) for VAT and deductions taken from employees' pay, such as PAYE.

5. The prescribed part, a ring fenced fund set aside for unsecured creditors.

6. Secured creditors with a floating charge, for example a bank holding a debenture over the company's assets.

7. Unsecured creditors, such as trade suppliers.

8. Shareholders.

How can a customer or supplier's insolvency affect your business?

A customer's insolvency can leave you with unpaid invoices you may never recover in full, while a supplier's insolvency can disrupt the goods or services your business relies on. If you supplied a customer on credit without taking security, you become an unsecured creditor, and once insolvency proceedings begin, outstanding invoices are often paid late or not at all. The good news is that warning signs often appear before a company becomes insolvent. How a business pays often changes before its financial position becomes obvious, and CCJs show that other creditors have already taken legal action to recover what they're owed. A company credit check shows a company's credit score, payment history, CCJs and other legal notices, so you can see how financially reliable a customer or supplier is before you agree credit terms. It also helps to limit how much any one customer owes you at a time, and to follow up quickly if a regular customer's payments start to slip. That way, less of your money is at risk if a customer does enter a formal insolvency procedure.

Spot the warning signs of commercial insolvency early with Capitalise

With a Capitalise account, you can check your own Experian-powered business credit score to understand how lenders and suppliers may view your business. With a paid plan, you can also see what’s affecting your score and monitor the customers and suppliers your cash flow depends on. You’ll receive alerts when their credit score, payment behaviour or legal status changes, including new CCJs and winding-up petitions, helping you spot potential risks early and take action before they escalate into insolvency.