BLP.11 — Corporate Insolvency

Ordinary company procedures in England and Wales.

Inability to pay debts (IA 1986 s.123)

• Cash-flow, s.123(1)(e): proof to the court's satisfaction that the company cannot pay debts as they fall due. This includes the reasonably near future, assessed in the circumstances of the business. Non-payment of a debt that is due and not genuinely disputed on substantial grounds is itself evidence from which the court can find cash-flow inability, so no statutory demand is needed first; a debt genuinely disputed on substantial grounds will not support a creditor's petition.
• Balance-sheet, s.123(2): proof to the court's satisfaction that asset values are less than liabilities, taking contingent and prospective liabilities into account. Eurosail [2013] UKSC 28 requires proper allowance for timing, contingencies and uncertainty, not a mechanical reading of the accounts or a separate 'point of no return' test. Either statutory test can establish inability; positive accounting net assets do not defeat proven cash-flow inability.
• Statutory demand, s.123(1)(a): the company owes the creditor strictly more than £750, then due. The creditor serves a written demand in the prescribed form by leaving it at the company's registered office. For three weeks after service, the company neglects to pay, or to secure or compound for the debt to the creditor's reasonable satisfaction. These conditions establish this deemed-inability route; an unpaid invoice or a demand for exactly £750 does not by itself do so.
• Other routes: in England and Wales, execution or other process on a court judgment, decree or order returned unsatisfied in whole or part is a separate route (s.123(1)(b)). No demand is required to prove inability under s.123(1)(e) or (2). Inability is a ground for winding up under s.122(1)(f), not an automatic winding-up order.

The procedures

• Liquidation: the liquidator gathers, realises and distributes assets; dissolution normally follows completion of winding up, not its commencement. Compulsory liquidation requires a court order. The company, its directors, any creditor (including a contingent or prospective creditor) or, subject to conditions, a contributory may petition (s.124(1)-(2)); the grounds include the company's special resolution to be wound up by the court, inability to pay debts and the just and equitable ground (s.122(1)(a), (f), (g)). Ordinarily the winding up is deemed to commence when the petition is presented (s.129(2)), and any disposition of the company's property after commencement is void unless the court otherwise orders (s.127(1)). Once a winding-up order is made or a provisional liquidator is appointed, no action or proceeding may be continued or begun against the company or its property without the court's leave (s.130(2)), and the official receiver becomes liquidator until another person is appointed (s.136(2)). The usual voluntary-liquidation route starts with a members' special resolution (s.84(1)(b)); the holder of any qualifying floating charge to which s.72A applies must first be given written notice, and the resolution may then be passed only after five business days or with its written consent (s.84(2A)-(2B)). The winding up commences when the resolution is passed (s.86). It is a members' voluntary liquidation only if the directors (or, where there are more than two, a majority) make a statutory declaration at a directors' meeting, after full inquiry, that the company will pay its debts in full with official-rate interest within a stated period not exceeding 12 months from commencement. The declaration has no effect unless it is made within the five weeks before the resolution (or that day, before it is passed) and contains a statement of assets and liabilities (s.89(1)-(2)). A director who makes it without reasonable grounds commits an offence (s.89(4)). Without that declaration the voluntary procedure is a creditors' voluntary liquidation (s.90); the label is not itself proof of insolvency. Liquidators can pursue recoverable antecedent transactions.
• Administration: Schedule B1 paragraph 3 sets three objectives: (a) rescuing the company as a going concern; (b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound up without first being in administration; and (c) realising property to make a distribution to one or more secured or preferential creditors. The administrator must pursue (a) unless they think it is not reasonably practicable to achieve, or think that objective (b) would achieve a better result for the company's creditors as a whole. The administrator acts in the interests of the creditors as a whole. Realising property for secured or preferential creditors, objective (c), is available only if the administrator thinks neither (a) nor (b) is reasonably practicable and creditors as a whole are not unnecessarily harmed. Entry is by court order or, subject to statutory conditions, out-of-court appointment by the company, directors or a qualifying floating charge holder (QFCH). The administration moratorium restricts enforcement and proceedings; it is not an absolute immunity from legal action. A QFCH holds one or more debentures secured by a qualifying floating charge (alone or with other security) over the whole or substantially the whole of the company's property (para 14). The company or its directors cannot appoint out of court while a winding-up petition or administration application is pending or an administrative receiver is in office (para 25), or within 12 months after an earlier administration they started ended (para 23). They must give any QFCH at least five business days' written notice of intention to appoint (para 26); the QFCH may appoint its own administrator under paragraph 14 in that period (para 44(7)(b)). During administration, without the administrator's consent or the court's permission, no step may be taken to enforce security, repossess hire-purchase goods, forfeit a lease by peaceable re-entry, or institute or continue legal process; no winding-up resolution may be passed and no winding-up order made, except on public-interest or regulator petitions (paras 42-43). An interim moratorium applies while an administration application is pending and after a notice of intention to appoint is filed (para 44). The appointment ends automatically after one year unless extended by the court or, for up to one year, by consent (para 76).
• CVA (Part I): an insolvency-practitioner-supervised arrangement can bind creditors entitled to vote, including those who would have been entitled if notified. Approval requires at least 75% by value of those responding. It fails if more than 50%, not exactly 50%, of the total value of unconnected creditors whose claims are admitted for voting vote against (rule 15.34). The creditors' decision can prevail over a different members' decision, subject to the court's power under s.4A. A CVA cannot interfere with a secured creditor's right to enforce its security, or displace statutory preferential priority or equal treatment within a preferential class, without the affected creditor's consent. A CVA proposal does not itself create a moratorium. Under s.6, an eligible applicant may challenge unfair prejudice or material irregularity. Normally the deadline is 28 days beginning with the first day on which all required reports have been made to the court; for an entitled creditor not notified of the decision procedure, it runs from awareness that the procedure took place. The court can revoke or suspend approval and direct reconsideration.
• Receivership: the general ban concerns administrative receivers, for floating charges created on or after 15 September 2003, subject to statutory exceptions (s.72A). It does not abolish fixed-charge or Law of Property Act receivers. A fixed-charge receiver is appointed by the chargee under the charge document; for a mortgage by deed, the statutory power to appoint a receiver of income arises when the mortgage money is due and may be exercised once the power of sale has become exercisable (LPA 1925 ss.101(1)(iii), 109(1)). The receiver acts over the charged asset only, is deemed the company's agent unless the deed provides otherwise (s.109(2)), collects its income and applies it in the statutory order, including interest and then principal if the chargee directs in writing, with the residue going to the person entitled to the income (s.109(8)). Wider powers, such as sale, come from the charge document. It is not a collective procedure: other creditors are not bound and the company is not wound up. A QFCH may instead appoint an administrator where the statutory requirements are met.
• CIGA 2020: introduced the separate Part A1 moratorium for eligible companies and the Companies Act 2006 Part 26A restructuring plan. A court may sanction a plan despite a dissenting class, including secured creditors, if s.901G's conditions are met: no member of that class is worse off than in the most likely alternative, and at least 75% by value of those present and voting in a class that would receive a payment or have a genuine economic interest in that alternative approve the plan. Meeting those conditions permits, but does not compel, sanction. Where the nominee's CVA report or the plan meeting application is made before the end of the 12-week period beginning the day after a Part A1 moratorium ends, moratorium debts and priority pre-moratorium debts have additional consent protections (IA 1986 s.4(4A)-(4B); CA 2006 s.901H).

Trading liability

• Wrongful trading: s.214 is the liquidator's civil contribution route after insolvent liquidation; s.246ZB is the administrator's equivalent after insolvent administration. The director, including a shadow director, knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration. The court must not order a contribution if the director took every step they ought to have taken to minimise potential creditor loss after that point. The standard is that of a reasonably diligent person having both the general knowledge, skill and experience reasonably expected of someone carrying out that director's functions (including functions entrusted to them) and the director's own general knowledge, skill and experience. The objective element is a floor: greater personal skill raises the standard, but inexperience does not lower it. These sections' insolvency definitions include the relevant procedure's expenses. Dishonesty is not required; liability is not automatic merely because trading continued.
• Fraudulent trading: s.213 (liquidator) and s.246ZA (administrator) permit civil contributions from any persons who were knowingly parties to carrying on the company's business with intent to defraud creditors of the company or of any other person, or for any fraudulent purpose. The relevant office-holder brings the statutory claim, but may assign the right of action under s.246ZD; the assignee can then pursue it. Dishonest participation is required, and liability is not confined to directors (Bilta v Tradition [2025] UKSC 18). The criminal offence is separate, under Companies Act 2006 s.993, and does not require winding up.

Common traps

• Order of distribution in liquidation. Keep the separate asset funds and the special s.174A priority following a Part A1 moratorium in view; the ordinary ordering below is subject to that regime. (1) Fixed-charge holders, from the proceeds of their charged assets after realisation costs; any shortfall is unsecured. (2) Liquidation expenses, including the liquidator's remuneration (s.176ZA(4)). (3) Ordinary preferential debts, ranking equally and abating proportionately: employees' remuneration for the four months before the relevant date up to £800, accrued holiday remuneration, and certain occupational pension contributions (Sch 6 paras 8-10). (4) Secondary preferential debts: HMRC debts for VAT and specified deductions (PAYE income tax, employee NICs, construction industry scheme and student loan deductions) (Sch 6 para 15D). (5) The prescribed part of net floating-charge property, set aside for unsecured creditors. (6) Floating-charge holders. (7) Unsecured creditors, proportionately. (8) Statutory interest on proved debts (s.189). (9) Members. Expenses and preferential debts are paid first from uncharged assets and take floating-charge property only if those assets are insufficient (ss.175(2)(b), 176ZA(1)).
• Prescribed part: 50% of the first £10,000 of net floating-charge property plus 20% of the rest, capped at £800,000, or £600,000 where the floating charge was created before 6 April 2020 and no later floating charge ranks equally or ahead. It does not apply if net property is under £10,000 and the office-holder thinks distribution would cost more than it is worth, or if the court so orders on that ground (s.176A(3), (5)). It is also disapplied by a CVA or a Companies Act Part 26 or Part 26A compromise or arrangement, to the extent that the arrangement disapplies it (s.176A(4)). Floating-charge property can meet expenses and preferential claims if the general estate is insufficient; the prescribed part, where applicable, reserves some net floating-charge property for unsecured creditors before the floating-charge holder is paid. Surplus reaches members only after liabilities, including statutory post-liquidation interest. Check special priorities after a recent Part A1 moratorium (s.174A), rather than applying this ordinary outline unchanged.
• Crystallisation: identify a legal or contractual trigger, such as winding up, appointment of a receiver or cessation of business; do not assume every finding of insolvency crystallises every charge. A crystallised floating charge remains floating for statutory insolvency priorities because its character at creation counts (s.251). Part A1 also restricts crystallisation during its moratorium, subject to specified exceptions (s.A22).
• Antecedent transactions: s.238 covers gifts/no consideration or significantly inadequate consideration, with a two-year lookback whether or not the recipient is connected. Its good-faith business-purpose defence also requires reasonable grounds for believing the transaction would benefit the company. A s.239 preference improves a creditor's, surety's or guarantor's position in an insolvent liquidation and requires that the company was influenced in deciding to give it by a desire to put that person in a better position (s.239(5)). Desire is subjective; a company actuated only by proper commercial considerations does not have it. The desire is presumed, rebuttably, for a connected recipient other than one connected only as an employee (s.239(6)). For preferences not also at undervalue, the lookback is six months, or two years for such connected recipients. Under s.240(2), those lookbacks require inability to pay debts at the time or caused by the transaction; that insolvency condition is rebuttably presumed for connected-party undervalues, not automatically for preferences. Count back from the onset of insolvency in s.240(3), not the first missed payment. For liquidation not following administration, the onset is the commencement of the winding up: presentation of the petition for a compulsory winding up (s.129(2)) or passing of the resolution for a voluntary one (s.86). For administration, it is the date the administration application is made, the date a notice of intention to appoint is filed, or otherwise the date the appointment takes effect. For liquidation immediately after administration, it is the date the company entered administration (or the earlier application or notice date). "Connected" persons include directors, shadow directors and their associates, and associates of the company itself (ss.249, 435); s.240(1)(c)-(d) separately covers the relevant pending-administration intervals.
• Avoidance of floating charges (s.245): a floating charge created at a relevant time is invalid except to the extent of value given at the same time as or after its creation: money paid or goods or services supplied to the company (goods and services at their ordinary-course value), the discharge or reduction of a company debt, and contractual interest on those amounts. The relevant time is two years before the onset of insolvency for a charge in favour of a connected person, and 12 months for anyone else; for an unconnected chargee the company must also have been unable to pay its debts (s.123) at the time, or become so as a result. No insolvency condition applies to a connected chargee, and there is no desire-to-prefer requirement. The unprotected security is invalid; the underlying debt survives, unsecured to that extent. Section 245(3)(c)–(d) also covers the pending-administration intervals; use its statutory onset definition in s.245(5), rather than counting from a missed payment.

Further remedies and company closure

• Restoration orders: ss.238–241 aim to restore the position without the undervalue or preference. Orders can return property, release security, require repayment or revive guarantees. Section 241 protects certain good-faith acquisitions for value and benefits received for value, with limits for transaction parties and preferred creditors; relief is not automatic confiscation from every later recipient.
• Extortionate credit: s.244 permits the office-holder to challenge credit transactions entered into within three years ending with entry into administration or liquidation. Having regard to the lender’s risk, the test is grossly exorbitant payments or gross contravention of ordinary fair dealing, not merely a high interest rate. Extortion is rebuttably presumed on the application. The court can set aside or vary obligations, order repayment or surrender of security.
• Transactions defrauding creditors: s.423 is also relevant to companies, not just bankrupt individuals; see BLP.12 for the undervalue and prohibited-purpose requirements. Do not substitute the s.238 two-year period for this separate route.
• Voluntary striking off: an alternative closure route under CA 2006 s.1003, not a procedure for distributing an insolvent estate. The directors or a majority apply. Section 1004 generally bars applications where the company traded, changed its name or undertook specified activities in the previous three months, but allows steps necessary to conclude its affairs or comply with law. Section 1005 separately bars applications during specified unresolved restructuring or insolvency proceedings. Within seven days a copy must reach the s.1006 recipients, including members, employees, creditors, non-applicant directors and employee pension trustees/managers. The registrar publishes a proposed striking-off notice inviting objections and must wait at least two months; dissolution occurs on publication of the final notice. Existing director/member liabilities are not extinguished.

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