When people search for the Insolvency Act 1986, it is usually because something feels urgent. Cash is tight, creditors are chasing, and you need straight answers. Not legal theory. Not worst-case headlines.
The Insolvency Act 1986 is the framework that decides what happens next. It sets out the main procedures that can protect your business, draw a line under unmanageable debt, or close a company in an orderly way. In this guide, Anderson Brookes explains what it means for liquidation, administration and CVAs, and how to take the next step with clarity and confidence.
What Is the Insolvency Act 1986?
The Insolvency Act 1986 is the main law in England & Wales that governs what happens when a company cannot pay its debts, or is heading that way. It sets the rules for the formal procedures you will hear about most often, including Company Voluntary Arrangements, administration and liquidation. It also explains who can be appointed to run those procedures, what powers they have, and how creditors are treated.
In simple terms, the Act does three big jobs:
- It creates a structure when things feel messy.
Instead of every creditor pushing at once, formal insolvency procedures bring order, deadlines, and clear steps. - It sets out protections and safeguards.
Some procedures can pause creditor action while a plan is agreed or a rescue is explored. Others ensure the company is closed properly, with assets realised and creditors dealt with fairly. - It draws a line around director decision-making once insolvency is on the table.
As soon as a company is insolvent, or insolvency is likely, the standard of decision-making changes. The law expects choices to be careful, recorded, and focused on limiting harm to creditors. The aim is not to blame you for getting into difficulty. It is to make sure the final stretch is handled responsibly.
If you are trying to work out which option fits your business, it helps to think of the Insolvency Act as a map. It doesn’t tell you what to choose, but it does explain what each route is designed to achieve, and what needs to happen for it to work.
When Is a Company Insolvent Under the Act?
The Act treats insolvency as a set of tests. Once one of those tests is met, the conversation changes. Your options may still be wide, but the decisions you make need to be more careful and better recorded.
The key legal test: “unable to pay its debts” (section 123)
Section 123 is the starting point. It sets out when a company is deemed unable to pay its debts. In plain English, the law is looking for one of two main patterns.
Cash flow insolvency (can you pay debts as they fall due?)
This is the day-to-day reality test. Can the company pay the bills it needs to pay, when it needs to pay them? That might be suppliers, HMRC, rent, payroll, or a specific demand that has to be dealt with now.
Balance sheet insolvency (do liabilities outweigh assets, including future and contingent liabilities?)
This is the bigger-picture test. Even if you are still paying today, the numbers may show the company cannot realistically meet what it owes overall, taking into account liabilities that are coming down the line.
In real life, these can overlap. A company may look “fine” on paper but be struggling to pay on time. Or it may be meeting this month’s bills while the wider position is quietly getting worse.
What this looks like in practice
If you are unsure whether you have crossed the line, it helps to step back and look at facts, not hope.
- Are you juggling payments week by week, choosing who gets paid and who waits?
- Are you relying on new credit, delayed taxes, or last-minute cash injections to stay afloat?
These are common signs that corporate insolvency may be approaching, even if trading is still happening.
Once insolvency is likely, delaying decisions can reduce your room to manoeuvre. It can also increase pressure from creditors, and make it harder to choose a process that fits the business rather than the loudest demand.
Your Duties When Insolvency Is Likely
When a company is solvent, you can usually make decisions with shareholders and growth in mind. When insolvency is likely, the focus shifts. The law expects you to consider creditors’ interests and to avoid making the situation worse. That can feel daunting, but it is also practical. It is about making careful choices and being able to show why you made them.
How to act responsibly from day to day
Keep a clear record.
If you are making decisions under pressure, write down what you knew at the time, what options you considered, and why you chose the route you did. Board minutes do not need to be perfect. They need to be honest and consistent.
Get a proper picture of cash and liabilities.
A weekly cash flow, a list of creditor balances, and a realistic view of what is due (including HMRC) will usually tell you more than a set of historic accounts.
Avoid making decisions that unfairly favour one creditor over others.
It is normal to feel pulled towards the creditor who is shouting loudest. But when insolvency is on the table, “paying one and ignoring the rest” can create problems later. The Act gives office-holders powers to review certain payments and transactions made before an insolvency process starts, including “preferences”.
Be cautious with assets leaving the business.
Selling assets quickly, repaying connected parties, or moving value out of the company can look questionable even when your intentions are good. If you need to take action, take advice first.
Trading while insolvent
Many directors keep trading because they are trying to fix things. The risk is when trading continues without a credible plan, or when new debts are taken on that the company cannot realistically pay.
If you are worried you may be crossing that line, our guide on trading while insolvent explains the practical risks and the warning signs to take seriously.
There is also a legal concept called “wrongful trading”. In broad terms, it can apply where a director continues trading when they knew, or ought to have concluded, there was no reasonable prospect of avoiding insolvent liquidation or administration.
That does not mean you must stop trading the moment cash is tight. It means you need a realistic plan, proper oversight, and a clear rationale for each decision.
A checklist to protect your position
Here is a quick, practical set of steps that usually helps:
- Update your financial picture (cash flow, creditor list, arrears, upcoming commitments).
- Hold a proper directors’ meeting and document decisions.
- Stop guesswork and pressure-led payments where possible.
- Speak to a licensed insolvency practitioner early so you understand the routes available.
If you do those things, you are not only reducing personal risk. You are also preserving options for the company.
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How the Insolvency Act 1986 Shapes Liquidation, Administration and CVAs
If you are looking at the Insolvency Act 1986 because you need a decision, it usually comes down to three routes. Each one has a different purpose. Each one also comes with a different level of protection, control, and finality. The Act is the rulebook that makes those differences clear.
- A CVA is about reaching an agreement with creditors so the company can keep trading, usually with a structured repayment plan.
- Administration is about protecting the business while a rescue, sale, or restructure is explored under an office-holder’s control.
- Liquidation is about closing the company properly, realising assets, and bringing the business to an end.
Company Voluntary Arrangement
A CVA is a formal deal between the company and its creditors. You continue to run the business day to day, but the arrangement is supervised by an insolvency practitioner. The Insolvency Act sets out the legal framework for this process, including how proposals are put to creditors and what happens once they are approved.
A CVA can work well where:
- the underlying business is viable,
- the debt problem is serious but not terminal,
- you need time and structure to catch up.
It is less likely to work where:
- cash flow is too tight to sustain trading during the arrangement,
- creditor pressure is already at breaking point,
- there is no realistic path to meeting ongoing costs as well as repayments.
If this is the route you are considering, our Company Voluntary Arrangement guide explains what a CVA involves, what creditors typically look for, and what makes a proposal credible.
Administration
Administration is designed to give the company breathing space while a formal plan is explored. Under administration, an administrator is appointed and takes control. The Insolvency Act sets out the objectives of administration and how it is meant to be used. The first objective is to rescue the company as a going concern, where that is achievable. If not, administration can still be used to achieve a better outcome for creditors than an immediate liquidation, or to realise assets in an orderly way.
Administration may be considered when:
- creditor action is escalating and you need protection,
- the business has value but needs time to restructure or sell,
- there is a realistic chance of saving all or part of the business.
It is not a “magic pause button”. It is a formal procedure with costs and strict duties. But in the right situation, it can protect jobs, preserve value, and stop the company being dismantled in a rush.
If you want to understand how this works in practice, including timelines and what happens to directors’ powers, see our guide to putting a company into administration.
Liquidation (including CVLs)
Liquidation is the formal process of winding up a company. A liquidator is appointed, assets are realised, and the company is ultimately closed. For many directors, liquidation sounds like “failure”. In reality, it is often the most responsible way to deal with a company that cannot be saved, especially where continuing to trade would only deepen the loss to creditors.
When directors choose to place the company into liquidation voluntarily, that is commonly done through a CVL. If you are at the point where closure is the right answer, a Creditors’ Voluntary Liquidation can allow the company to be wound down in an orderly way, with clear steps and an appointed insolvency practitioner.
If you want a straightforward overview of what liquidation involves, including what happens to assets, employees, and director responsibilities, our guide on business liquidation breaks it down in plain English.
FAQs
When insolvency is on the table, the hardest part is often the uncertainty. You can live with a tough decision. It is the not knowing that drains you. These are some of the concerns we hear most, and how they usually play out in practice.
“Do I have to stop trading straight away?”
Not always. But you do need to be honest about what trading is achieving.
If trading is buying time for a realistic plan, and you are keeping decisions under close review, continuing may be appropriate. If trading is only creating new debts that you cannot pay, it can increase risk quickly.
That is why it helps to understand the practical red flags around trading while insolvent. It is often less about one dramatic moment, and more about a pattern of decisions made under pressure.
“Could I be personally liable for company debts?”
In most cases, limited liability still does what it is meant to do. Company debts are owed by the company.
Personal exposure tends to arise where there are specific issues, such as personal guarantees, or where decisions made during insolvency are later challenged. The law includes provisions around conduct and decision-making, including the idea of wrongful trading in certain circumstances.
If this worry is on your mind, the most protective step is usually the simplest: get the facts, take advice, and document decisions properly.
“What if I’ve paid some creditors and not others?”
This is common. When cash is tight, payments often become reactive.
The concern is that some payments made before a formal insolvency process can be reviewed later, particularly if they are seen as favouring one creditor over others. The Insolvency Act gives office-holders powers to challenge certain transactions, including preferences.
That does not mean you have done something wrong. It does mean it is worth getting advice before making further “pressure payments”, so you understand the risks and can avoid making the position harder.
“If we choose a CVA, will creditors actually agree?”
Sometimes yes. Sometimes no. It depends on whether the proposal is credible and whether creditors believe it is a better outcome than the alternatives.
In general, creditors look for a plan that:
- is based on realistic trading and cash flow,
- treats creditors fairly,
- and is backed by clear information.
“Is administration a rescue, or just delaying the inevitable?”
It can be either, depending on the facts.
The law sets objectives for administration, with rescue as the first aim where possible. But administration can also be used to achieve a better result for creditors than an immediate liquidation, or to realise assets in an orderly way.
In practice, administration is most useful when there is something to protect. That might be contracts, employees, stock, customer relationships, or the value of selling the business as a whole rather than in pieces.
“If liquidation is the answer, can it be handled respectfully?”
Yes. Liquidation is often framed as a dramatic event. In reality, it can be the most controlled and responsible way to bring a situation to an end, especially where continuing to trade would deepen losses.
“What should I do first, before I decide anything?”
Don’t try to carry the decision alone. Even a short conversation can give you clarity on what is realistic, what is risky, and what route fits. It also helps you avoid unforced errors, especially around timing and payments.
Ready to make a decision? We can help
If insolvency is on the table, you do not need to work this out alone. A short conversation can help you understand where you stand under the Insolvency Act 1986, what options are genuinely available, and what needs to happen next.
At Anderson Brookes, we will listen first. Then we will explain your choices in plain English, including whether a CVA, administration or liquidation is likely to fit. If you decide to move forward, we will guide you through the process carefully and keep you informed at every step.
To get clarity, get in contact with Anderson Brookes online. You can also call us on 0800 1804 935.
