How to Close an Insolvent Company UK (2026 Guide)

In 2026, UK insolvencies are at a 14-year high. Many directors are unsure how to close an insolvent company safely. Chris Worden explains the right steps to protect yourself and your business.

What Does Insolvent Mean?

Insolvency is not about how you feel—it's about the numbers. There are two main tests:

• Cash flow test: Can you pay debts when due? If not, you're insolvent.
• Balance sheet test: Are liabilities greater than assets? If yes, you're insolvent.

If either test applies, your duties as a director change. You must prioritise creditors over yourself.

How to Close an Insolvent Company

There are two main ways to close an insolvent company in the UK:

• Creditors' Voluntary Liquidation (CVL): You choose to close the company. A licensed insolvency practitioner is appointed. This route protects you if you act responsibly.
• Compulsory Liquidation: A creditor (often HMRC) forces closure via a winding up petition. This is riskier and can lead to more severe consequences for directors.

Voluntary Liquidation Process

1. Find a licensed insolvency practitioner.
2. Hold a board meeting to agree closure.
3. 75% of shareholders must approve.
4. Creditors are notified and a meeting is held.
5. The liquidator sells assets to repay creditors and reviews director conduct.

If you act responsibly, you are usually protected and can start another company unless disqualified.

Compulsory Liquidation Risks

• Triggered by a winding up petition (often from HMRC).
• Bank accounts are frozen and trading becomes impossible.
• The official receiver investigates director conduct.
• Consequences are usually worse than voluntary liquidation.

Key Risks for Directors

• Personal guarantees: These follow you after liquidation.
• Overdrawn director's loan accounts: You may have to repay these personally.
• Wrongful or reckless trading: Continuing to trade while insolvent can lead to personal liability.
• Preference payments: Paying some creditors over others can make you personally liable.

How Are Creditors Paid?

1. Secured creditors (with a charge over assets)
2. Preferential creditors (including HMRC)
3. Unsecured creditors (suppliers, landlords, etc.)

Staff can claim redundancy and unpaid wages through the Redundancy Payments Service. Directors may also qualify in some cases.

How to Protect Yourself

• Act early and seek advice.
• Document everything and be transparent.
• Choose voluntary liquidation over compulsory where possible.
• Work with, not against, the insolvency practitioner.

Key Takeaways

• Understand insolvency tests and your duties as a director.
• Voluntary liquidation is safer than compulsory liquidation.
• Personal guarantees and overdrawn loans are major risks.
• Act quickly and honestly to protect yourself.
• Chris Worden and Director First can help you navigate the process.

FAQs

What is the difference between voluntary and compulsory liquidation?

Voluntary liquidation is initiated by directors, offering more control and protection. Compulsory liquidation is forced by creditors through the courts and carries higher risks for directors.

What happens to personal guarantees after liquidation?

Personal guarantees remain enforceable. Creditors can pursue you personally for any shortfall after company assets are realised.

Can I start another company after liquidation?

In most cases, yes, unless you are disqualified as a director due to misconduct.

What is an overdrawn director's loan account?

This is money you owe the company. In liquidation, you may be required to repay it personally.

How can I protect myself as a director?

Act early, seek professional advice, document your actions, and choose voluntary liquidation if closure is unavoidable.

Need confidential advice? Contact us today for a free, no-obligation chat about your options.