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Insolvency Guide UK

Guidance for directors under pressure

Important: This guidance relates to company insolvency in England and Wales.

What is the cashflow test for insolvency?

How the cashflow test works and what it means for directors.

Understanding insolvencyLast reviewed: 2026-03-10

When this applies

This applies where a company may be struggling to pay debts as they fall due, even if the balance sheet does not yet look irrecoverable.

What directors should do now

  • Review short-term cash commitments
  • Check overdue creditors, HMRC liabilities, and payroll
  • Compare expected receipts against actual obligations
  • Take advice if the company cannot meet debts on time

Risks if ignored

A business can become legally insolvent under the cashflow test even where directors still believe it has long-term value. Ignoring this can lead to escalating creditor action.

Related guidance

Short answer

In most cases, this situation means the company is under financial pressure and may already be insolvent or at risk of becoming insolvent. Early action can preserve options, but delay reduces the likelihood of recovery and increases risk to directors.

Plain-English explanation

This issue usually arises when a company cannot meet its financial obligations as they fall due, or its liabilities outweigh its assets. It may involve creditor pressure, HMRC arrears, or legal enforcement such as statutory demands or court action.

Some businesses can stabilise through restructuring, negotiation, or formal processes. Others will need to enter an insolvency procedure to bring the situation under control.

The key is understanding how serious the position is and acting before options narrow.

Why this matters for directors

When financial pressure reaches this stage, directors must prioritise the interests of creditors.

Risks of inaction include:

  • personal liability for wrongful trading
  • escalation of legal action
  • loss of control over the process
  • reduced recovery or restructuring options

Taking early advice and documenting decisions helps protect directors and improves outcomes.

What to check now

Directors should quickly review:

  • current cash flow and ability to meet upcoming payments
  • total creditor exposure, including HMRC
  • any legal notices (statutory demands, CCJs, petitions)
  • key deadlines or enforcement risks
  • viability of the underlying business

This determines whether recovery is realistic or formal action is needed.

What usually happens next

Most situations follow one of three paths:

  1. Informal resolution
    Payment plans, restructuring, or cost reductions stabilise the business.

  2. Formal insolvency process
    Administration, CVA, or liquidation is used to manage the situation.

  3. Escalation
    Creditors take legal action, reducing director control and increasing urgency.

The earlier action is taken, the more options remain available.

Related guidance

See also: