If your business is facing insolvency it is important to be aware of your responsibilities and the legal issues around it. In this article we will look at the legal issues around insolvency and what you need to know.


Simply put, insolvency is when a company can’t meet its financial liabilities. When this happens a legal representative has to be brought in to oversee the repayment of debts (typically the main priority will be the costs involved, followed by debts to secured creditors and finally payments to unsecured creditors).

Different types of liquidation

• Compulsory – Commenced by the company itself because they can’t pay debts. Often a receiver won’t carry on the business and they will be responsible terminating contracts. Employees may also be entitled up to 8 weeks pay.
• Creditor’s Voluntary – Creditors appoint a liquidator, the difference being this time they are employed by the company (this means employees may not necessarily have their contracts terminated).
• Member’s Voluntary (Solvent) – This is when a company is able to meet their liabilities. At this point a liquidator is brought in to ensure debts are paid in full and the company’s assets can be shared amongst the individual shareholders.

Administration orders

This can happen when there is hope of an insolvent company being rescued. For example, in some cases it may be better to sell the company rather than wind it up. During this time legal proceedings can’t happen unless there is an agreement with the court or the administrator.

In this instance an administrator is effectively an agent of the company so they do not necessarily result in contracts being terminated.

Voluntary arrangements

It may also be possible to make an arrangement with a creditor – for example you could rearrange debt repayments for two to four years (although it is important once you have made an arrangement you need to stick to it).

In most cases with these arrangements the employment contracts of employees are not affected.

Sole traders

A sole trader may apply for personal bankruptcy – a trustee then has to be brought in to distribute assets. As with other forms of voluntary arrangements it does not necessarily result in cancelled employee contracts.

Get the help you need

As you can see there are a number of options when it comes to insolvency and it may not necessarily result in the closure of your company (and indeed you may get a better deal selling the company.) It is not always easy to know what is appropriate for your business is in this situation.

This is why it helps to discuss your situation with an experienced legal representative. We believe in having the resources to give you the best possible representation while at the same time being able to listen to what you have to say and guide you through the process.

For more information or to learn more please contact us and we will help you get the representation you need and make sure the insolvency process runs as smoothly as possible.