Dealing with insolvency and liquidation can be tough for directors, especially in today’s unpredictable economy.
In July 2025, 2,081 companies went insolvent in England and Wales. This was a 1% increase from June 2025 and the same as July 2024. This is a serious reminder that directors must act fast to understand their options and protect themselves from personal liability in such uncertain times.
Understanding these concepts enables directors to make well-informed decisions, act responsibly, and mitigate personal liability when managing or winding up a company.
At Advent Communications, we help you manage business risks and navigate complex situations with expert guidance.
Let’s examine ten key terms related to insolvency and liquidation that every director in the UK should be familiar with.
Essential Insolvency and Liquidation Terms for UK Directors
Here are the ten essential insolvency and liquidation terms for UK directors:
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Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) occurs when a company’s directors decide to close the business because it is unable to pay its debts. They often make this decision when the company has more liabilities than assets, and they believe it is best for the creditors. A CVL avoids the more damaging compulsory liquidation process enforced by the court.
When retailer X had financial issues, it chose to use a Company Voluntary Liquidation (CVL). This helped them avoid going to court for liquidation, thereby protecting their assets and reputation.
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Compulsory Liquidation
Compulsory liquidation occurs when a court orders a company to be closed, typically because a creditor has requested it due to unpaid debts. A creditor can initiate this process if they haven’t been paid, hoping to recover their money. This leads to the sale of the company’s assets to pay off debts.
Speciality Steel UK, part of the Liberty Steel Group, went into compulsory liquidation in 2025. The High Court made this decision because the company had unpaid debts and failed to operate correctly.
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Administration
Administration is a process that helps a company reorganise its debts and operations to save it from bankruptcy. An insolvency practitioner, known as the administrator, takes control of the company. The goal is to either rescue the business or liquidate its assets. This provides relief for directors and protects them from further actions by creditors.
Bulb Energy, a UK company has entered administration because of financial challenges during the energy crisis. Administrators are now responsible for managing the company and seeking a buyer to ensure continued operations.
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Pre-Pack Sale
A pre-pack sale is when a business sells its assets before going into formal admin. This method aims to protect the company’s value by quickly selling important assets, often to a new or related enterprise, before starting the insolvency process. Pre-pack sales can be controversial since creditors typically receive a minimal payment.
Recently, Pizza Hut used a pre-pack sale to sell its assets to a buyer quickly. This move helped save more than 3,000 jobs and turned the company around despite its financial problems.
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Receivership
Receivership happens when a creditor hires a receiver to manage a company’s assets and operations. This typically occurs when a lender holds a secured claim on the firm’s property assets and seeks to recover its debt. The receiver oversees the company’s operations and can sell assets to settle creditors’ claims.
In 2025, a lender hired a receiver to manage the sale of a property developer’s assets because they could not recover their debt.
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Winding-Up Petition
A winding-up petition is a legal step that creditors or other interested parties take to start the process of closing a business. A creditor usually files this petition when a company fails to pay debt and doesn’t respond to requests for payment. Once the court approves the company begins the liquidation process.
If a creditor has been waiting for several months to be paid for overdue invoices, they might file a winding-up petition to push the company into liquidation and retrieve their money.
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Insolvent Trading
Insolvent trading happens when a business continues to operate while understanding it can’t pay its debts. Directors must take action to prevent this situation because trading while insolvent can make them personally liable. If directors engage in insolvent trading, they may face legal consequences.
For example, if a retail company keeps buying new inventory even though it can’t pay current suppliers, it is engaging in insolvent trading. This could result in legal trouble for the directors.
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Wrongful Trading
Wrongful trading occurs when a company director lets the business continue operating, despite knowing it is insolvent and likely to go bankrupt. Unlike insolvent trading, which focuses on the actions of the company while it is in trouble, wrongful trading deals with not taking action when bankruptcy is sure. If found guilty of wrongful trading, a director may be personally responsible for the company’s debts.
One common example of wrongful trading is when directors decide to pay themselves in dividends instead of a salary. This choice can reduce taxes but may harm creditors and lead to legal issues if the company liquidates.
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Moratorium
A moratorium is a temporary halt on actions by creditors, like lawsuits or enforcement actions. At the same time, a company addresses its financial issues. This pause allows company directors to explore options for restructuring their debts without the worry of legal actions.
In 2023, a UK retailer requested a freeze on creditor actions to gain time to reorganise its finances before facing bankruptcy.
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Debt Restructuring
Debt restructuring involves talking with creditors to change the terms of a company’s debt, making it easier to manage. This process can include lower interest rates. It’s vital for firms that want to avoid bankruptcy and keep running.
For instance, a regional restaurant chain faced financial challenges due to pandemic lockdowns and high-interest loans. By collaborating with a debt advisory company, it renegotiated its debt for lower rates and extended terms, allowing the chain to survive, pivot to online delivery, and grow its market share.
Conclusion
As an SME director, it’s crucial to understand the concepts of insolvency and liquidation. Understanding these terms helps protect both your business and personal interests.
This knowledge lets you handle financial difficulties more effectively, make well-informed decisions, and take the necessary steps to either restructure or thoughtfully close down your business.
By learning these terms, you can avoid legal issues and safeguard your company from unnecessary risks during tough times.