When a company can’t pay its debts, it usually means the problem has moved beyond a temporary cash flow issue. Bills are due. Money is not available. Creditors are chasing payment.
This does not automatically mean the company must close immediately. But it does mean it is at risk of insolvency. What happens next depends on how quickly directors act and what options are still available.
Understanding the process helps directors make decisions before the situation worsens.
What It Means When a Company Can’t Pay Its Debts
A company is considered insolvent when it cannot pay its debts as they fall due or when its liabilities are greater than its assets. This is not just an accounting definition. It reflects the company’s actual ability to operate day-to-day.
If suppliers, lenders, or HMRC are not being paid on time and there is no realistic way to catch up, the company may already be insolvent. At this point, continuing to trade as usual can increase losses for creditors.
Once insolvency is likely, directors are expected to act differently. Their legal duty shifts from protecting shareholders to protecting creditors. This change is critical and often misunderstood.
How Companies Usually Reach This Point
Most companies do not suddenly become unable to pay their debts. The problem usually develops over time.
Payments start to slip. Credit terms are stretched. Tax bills are delayed. Short-term borrowing is used to cover everyday costs. At first, this can feel like managing cash flow. Over time, it becomes survival.
The danger is that this stage feels familiar. Directors get used to juggling payments and assume the business will recover. If underlying issues are not resolved, debt builds quietly until it becomes unmanageable. By the time creditors start applying real pressure, options may already be limited.
How Common Is Company Insolvency in the UK?
Many directors believe they are in a rare situation. The reality is very different. In 2024, there were 23,872 registered company insolvencies in England and Wales, a 5% decrease from the previous year’s 30-year high. This total remains at levels last seen during the 2008-09 recession. This shows how common it is for businesses to reach a point where debts can no longer be managed.
What Directors Are Expected to Do Once Debts Can’t Be Paid
When a company can’t pay its debts, directors are expected to stop and assess the situation honestly. This means reviewing what the company owes, who it owes money to, and whether there is any realistic path to recovery.
Continuing to trade without a clear plan can increase losses and create personal risk for directors. Paying some creditors while ignoring others can also cause problems later.
At this stage, delay is often more damaging than action. Directors who face the situation early usually have more control over the outcome.
What Options Exist When a Company Can’t Pay Its Debts
The next steps depend on whether the company can realistically recover.
Some companies can be stabilised if action is taken early enough. This might involve reducing costs, renegotiating payment terms, or restructuring debt. These options depend on whether the underlying business is still viable.
When recovery is not possible, closing the company in an orderly way may be the most responsible choice. In these cases, a Creditors’ Voluntary Liquidation is a formal process used to close an insolvent company, deal with its debts properly, and bring trading to an end under clear legal rules. This process exists to prevent further losses and provide structure during a difficult time.
What Happens to Creditors When a Company Can’t Pay Its Debts
When a company enters a formal insolvency process, creditors are notified and the company’s financial position is reviewed. Assets are identified and, where possible, sold.
Any funds raised are distributed in accordance with legal priority. Secured creditors are usually paid first, followed by other classes of creditors where funds allow. In many cases, not all debts are repaid, but the process ensures fairness and transparency.
What Happens to Employees When a Company Becomes Insolvent
Employees are usually made redundant when a company can no longer trade. This is often the hardest part of the process for directors.
There are protections in place. Eligible employees may be able to claim redundancy pay, unpaid wages, and other statutory entitlements through government schemes. While this does not remove the impact, it provides some financial support during the transition.
Clear communication and a defined process help reduce confusion and distress.
Why Acting Early Makes a Real Difference
Timing has a major impact on outcomes when a company can’t pay its debts. Acting early preserves options. It limits additional debt. It reduces stress for everyone involved.
Waiting rarely improves the situation. It usually increases costs and pressure until decisions are forced by creditors or HMRC. By then, choices are limited. Early action is not a sign of failure. It is a sign of responsibility.
What to Do If Your Company Can’t Pay Its Debts
If your company can’t pay its debts, the most important step is to acknowledge the situation and review your options. Ignoring the problem almost always makes it worse.
Understanding what happens next allows directors to make informed decisions and move forward with clarity. Handled properly, even this situation can lead to a clean break and a fresh start. Your accountant will be able to give you the professional advice you need to ensure you pick the best option.