Company insolvency FAQs

When is a company insolvent?

Under the Insolvency Act 1986 a company is insolvent when it does not have enough assets to meet all its debts or is unable to pay its debts when they fall due. When a company becomes insolvent, it must follow an insolvency procedure, such as administration or liquidation. Company directors are responsible for recognising when their company becomes insolvent, and they can be held legally responsible for continuing to trade whilst insolvent.

Company directors can enter the company into insolvency procedures, but creditors (those owed money by the company) can also apply to the court to force a company to enter an insolvency procedure.

What is administration?

Administration is an insolvency procedure where an independent insolvency professional, acting as an administrator, takes over management of the insolvent company. The administrator has legal objectives to attempt to rescue the company as a viable business and to seek the best return for the company’s creditors.

When a company enters administration, a statutory moratorium automatically applies, preventing creditors from taking legal action against the company to recover their debts. This legal protection lasts for the duration of the administration and allows the administrator breathing space to perform their duties.

Administration can end with the company returned to solvency, usually through the renegotiation of company debts with creditors, known as restructuring. Normally, most creditors must agree to the restructuring plan which tends to include writing off some company debts in order to re-structure the company as a viable business. Where the administrator is unable to salvage the business, administration can end in the liquidation, or winding up, of the company.

For more information about administration, see the Library briefing Insolvency: Company administration.

What is liquidation?

Insolvent liquidation is where an independent insolvency professional, acting as a liquidator, closes down an insolvent company. The liquidator sells the remaining assets of the insolvent company and distributes them to creditors (those owed money by the company) according to a strict legal order.

There are two types of insolvent liquidation:

• Creditors’ Voluntary Liquidation(CVL). This happens when the members (shareholders) vote by a 75% majority to close the company down; and
• Compulsory liquidation. This is when a court orders that the company be closed down and appoints a liquidator. Unlike a CVL, shareholder consent is not required and court proceedings are usually initiated by a creditor.

For more information about liquidation, see the Library briefing Insolvency: Company liquidation.

How do I get money owed back from an insolvent company?

Individuals might be owed money by an insolvent company for a number of reasons including:

• They bought goods and services from the company which haven’t been delivered.
• They worked for the company and are owed wages or money awarded by employment tribunals.
• They loaned money to the company.

Those owed money can register as a creditor with the person or organisation managing the insolvency, such as the administrator or liquidator.

Details of who is managing the insolvency can be found on the company’s page on the company register; they will also publish regular updates on the progress of the administration or liquidation to the register. Alternatively, individuals can identify the insolvency practitioner by searching the insolvency notices of the Gazette, the official public record.

Employees of insolvent companies can apply to the Insolvency Service to have the government cover some debts they are owed by the company including unpaid wages and some, but not all, tribunal awards. However, not all debts are covered, and there is a cap on how much employees can claim. For more information see the Library briefing Employment rights and insolvency.

Will I get my money back from the company?

When a company’s assets are sold to pay creditors, creditors must be paid, by law, in order according to a “hierarchy of creditors”.

Each class of creditor is paid in full before any distribution can be made to the next class. So if the company doesn’t have enough money to pay all its debts, low ranking creditors may not receive any return.

Broadly, a secured debt, fixed against a specific asset such as a mortgage on a building, will be paid first, and guaranteed the proceeds from the sale of that specific asset. However, an unsecured debt, such as an outstanding customer refund, would be paid after the secured creditors, with whatever funds are left.

Payments must be made to the following classes of creditors in order:

1. Secured creditors with a fixed charge (creditors with security over a specific asset such as a bank with a mortgage)
2. Insolvency practitioners’ fees and expenses
3. Preferential creditors (such as employee salaries and pension contributions)
4. Secondary preferential creditors (including certain HMRC debts)
5. Prescribed part creditors (the Enterprise Act 2002 created a guarantee for unsecured creditors to receive a proportion of the distribution to certain secured creditors)
6. Secured creditors with a floating charge (creditors with security over the company’s general pool of assets, rather than a specific asset)
7. Non-preferential creditors (unsecured creditors such as suppliers owed payment, or customers owed refunds)
8. Shareholders

Can I claim back money I’m owed by an insolvent company from my credit card provider?

If someone is owed something they’ve paid for from an insolvent company, they may be able to get a refund from their credit provider.

Section 75 of the Consumer Credit Act 1974 means that when a consumer buys something with credit, the credit provider and the supplier of those goods and services are jointly liable.  This applies to purchases between £100 and £30,000.

If a supplier enters insolvency, the customer may be unable to claim a full, or timely refund, from the supplier, but they may be able to claim a full refund from the credit provider.

What happens to gift cards from an insolvent company?

Gift cards and vouchers are effectively a pre-payment for a good or service. The customer pays in advance in exchange for the gift card, which can then be redeemed later for goods or services. Therefore, unredeemed gift cards and vouchers are treated as unsecured company debts. When a company enters insolvency, a customer holding a gift card is considered an unsecured creditor, ranking below secured and preferential creditors.

When an insolvent company enters administration, administrators take control of the company, which is automatically protected from legal claims by creditors. In an administration, the administrator may choose to honour customer prepayments such as gift cards, or offer refunds, but they are under no obligation to do so.

If the company is liquidated (where its assets are sold off to repay creditors and the company ceases to exist), the refund of gift cards would be paid almost last.

For more information about gift cards and customer prepayments, see the Library briefing Consumer payments made in advance of receiving goods or services.

About the author: Abbas Panjwani is a researcher at the House of Commons Library specialising in financial systems and consumer finance.  

Disclaimer​

The Commons Library does not intend the information in this article to address the specific circumstances of any particular individual. We have published it to support the work of MPs. You should not rely upon it as legal or professional advice, or as a substitute for it. We do not accept any liability whatsoever for any errors, omissions or misstatements contained herein. You should consult a suitably qualified professional if you require specific advice or information. Read our briefing for information about sources of legal advice and help.