Guide to Corporate Financial Distress in England and Wales

Insolvency experts have witnessed a record jump in the number of UK businesses in critical financial distress in recent months, according to the BBC.

A company experiences financial distress when it has, or anticipates having, difficulty paying its debts as they fall due. This can happen for various reasons, such as loss of contracts or key customers, market issues, or because of ineffective financial management.

Signs of Financial Distress in a Company

The key signs of financial distress are poor profitability and cash flow which, if left unaddressed, risks the organisation running out of money and having to embark on a formal insolvency procedure.

When companies are experiencing financial distress, early intervention is key. If directors recognise the issues early on, they have more time and options to turn the business around and avoid insolvency.

The Insolvency Act 1986 states that a company is legally insolvent when it does not have enough assets to meet all its liabilities (‘balance sheet test’) or is unable to pay its debts when they fall due (‘cash-flow test’).

Company directors are responsible for recognising when their company becomes insolvent, and they can be held legally responsible for continuing to trade whilst insolvent.

Options for Distressed Companies

Here, we look at some of the main options for solvent and insolvent financially distressed companies in England and Wales.

Solvent Restructuring Options:

1. Turnaround plan.

• The starting point for most financially distressed companies is to consider whether they can come up with a viable turnaround plan.
• An organisation undertakes a detailed review of its current financial position.
• The management team then formulates a plan to address the issues it has identified and return the business to profit (usually over 1–2 years).
• Common turnaround plans include winding down or selling unprofitable business units and asking customers to renegotiate contracts with higher prices and/or more favourable terms.

2. Liquidity options.

• An organisation can also explore various options to improve its liquidity, which is usually done in conjunction with a turnaround plan.
• This could include asset sales, renegotiating its borrowing terms, arranging new cash injections into the business, or a debt for equity swap.

Insolvent Restructuring Options:

1. Administration

• Administration is designed to keep an insolvent company running while the insolvency practitioner (the administrator) determines the most appropriate course of action.
• Contracts are not terminated automatically. The administrator can use its discretion as to whether the business can continue to trade.
• Administration is only viable if there are sufficient funds to cover the relevant costs.
• The administrator can raise funds from various sources, for example, by selling assets or from stakeholders providing money to support the process, in the expectation that they will get a better return from the business entering administration rather than winding up the company through a liquidation.
• Companies can go into administration through a court order or via an out-of-court route.
• The organisation’s directors will usually appoint the administrator (who must be a qualified insolvency practitioner), although this can also be done by certain secured creditors.
• The administrator, rather than the board of directors, will run the company while considering future options.
• The primary objective of administration is to rescue the company as a going concern. If this is not possible, the intention is to achieve a better result for the company’s creditors than liquidation.

2. Company Voluntary Arrangements (CVA).

• A CVA allows a company to continue trading by agreeing a payment plan with its creditors.
• Under a CVA, creditors agree to accept reduced or rescheduled repayments while the company is restructured.
• A CVA needs the approval of 75% of creditors (by value of the creditors who vote.).
• Company directors retain control of the company.
• Company directors submit a report on the company’s finances, together with a debt repayment plan, to an insolvency practitioner who will authorise and oversee the CVA.
• The insolvency practitioner is responsible for ensuring the company makes payments to creditors.
• If the CVA is completed with all payments made, the company will emerge from the process with its debts repaid.
• If payments are not made as agreed, the CVA will fail. Creditors will then either agree a new CVA or place the company into administration or liquidation.

3. Liquidation (‘Winding Up’).

• An insolvent company can be put into liquidation if its operations need to be stopped to avoid accruing further debts.
• Once a company enters liquidation, there is no chance for it to rescue itself.
• Liquidation can happen in two ways:

1. Compulsory liquidation. This is a creditor-led process. Creditors petition the court to wind up the company and appoint a liquidator.
2. Voluntary liquidation:
   1. Creditors’ Voluntary Liquidation. In this case, the directors determine that the company is insolvent and pass a resolution to appoint a liquidator. The directors then approach the creditors for their agreement to the process.
   2. Members’ Voluntary Liquidation. In this case, the company is solvent but is choosing to wind up.

• Once a liquidator has been appointed, the directors’ executive powers cease.
• The liquidator then sells the assets of the company and, provided there are sufficient funds after their own costs have been covered, makes a distribution from the proceeds to creditors.
• The liquidator will normally be an insolvency practitioner, although the court can appoint the Official Receiver for the role if there are insufficient assets.
• You can check if a company is being liquidated or in provisional liquidation on the government’s website

More help and guidance about dealing with company distress is available on the government’s website by clicking here. Search for details of companies involved in insolvency proceedings on The Gazette’s website.

Click here to access the pdf version of our Guide to Corporate Financial Distress in England and Wales.

This blog was prepared on 24 March 2025. It is not intended to be advice and should not be relied upon as such.