When a client company becomes insolvent

Q: What should the accountant avoid?

Acting as an insolvency practitioner. Section 389 of the Insolvency Act 1986 makes it an offence to act as an insolvency practitioner in relation to a company when not qualified to do so. Formal appointments and the advice that goes with them belong with a licensed practitioner. Getting its own fees paid first. Under section 239 an office holder can challenge a preference: anything that puts a creditor in a better position on insolvent liquidation, where the company was influenced by a desire to do that. Section 240 sets the look back as 6 months before the onset of insolvency, or 2 years for a connected person. ICAEW's helpsheet warns that arrangements such as standing orders for fees may create a preference, and that a firm continuing to act may join the unsecured creditors. Holding records hostage. Section 246 makes a lien over a company's books, papers or records unenforceable against an administrator, liquidator or provisional liquidator, except for documents giving title to property and held as such. Helping set up a successor company carelessly. Section 216 bars a person who was a director or shadow director in the 12 months before insolvent liquidation from being involved, for 5 years, with a company using the same or a similar name, except with leave of the court or in prescribed circumstances. See phoenix companies and prohibited names.

Q: What does this look like in practice?

Illustration only. While preparing year end accounts, a firm sees that a client company owes HMRC £40,000 of PAYE and VAT, its overdraft is at its limit and suppliers are on stop. The director asks the firm to decide which suppliers to pay to keep trading. The firm instead writes to the board setting out the section 123 tests, the wrongful trading risk and the need to treat creditors equally, recommends that the board see an insolvency practitioner that week, and lists the information the practitioner will need. It discusses a material uncertainty note with the directors, does not take a lump sum for its own outstanding fees, and records each conversation on file.

When a client company is insolvent, the accountant’s role is to make sure the directors understand that their duties now run to the creditors, to recommend early advice from a licensed insolvency practitioner, preferably in writing, and to keep the accounts honest about going concern. The accountant should not take the decisions for the board, take payment of its own fees ahead of other creditors, or hold itself out as giving insolvency advice it is not licensed to give.

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How do you know the company is insolvent?

Section 123 of the Insolvency Act 1986 sets out the tests. A company is deemed unable to pay its debts if it is proved that it cannot pay its debts as they fall due (the cash flow test), or that the value of its assets is less than its liabilities, taking into account contingent and prospective liabilities (the balance sheet test).

The Insolvency Service puts it in plain terms: a company is insolvent when it cannot pay bills when they become due, or has debts larger than the value of its assets. A balance sheet showing net liabilities does not by itself prove insolvency; see negative net assets: is the company insolvent.

What changes for the directors?

The Insolvency Service’s director information hub says that once a company becomes insolvent, the directors’ priorities shift from the shareholders to the creditors. They must protect the company’s assets, treat all creditors the same, make sure the company does not worsen the creditors’ position, and consult with or consider appointing an insolvency practitioner. It warns that directors can become personally liable for wrongful trading, fraudulent trading, misfeasance and compensation orders.

Wrongful trading is the risk accountants most need to explain. Under section 214 of the Insolvency Act 1986, a liquidator can ask the court to order a director to contribute to the company’s assets if the company has gone into insolvent liquidation and, before that, the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration. The defence in section 214(3) is that, from that point, the director took every step to minimise the potential loss to creditors that they ought to have taken. Section 214(4) judges this by the standard of a reasonably diligent person with the general knowledge, skill and experience expected of someone in that role and the knowledge, skill and experience the director actually has.

ICAEW’s article on directors’ duties in the zone of insolvency points out that this is an absolute test, every step rather than every reasonable step, and that a director who is also a qualified accountant will be expected to understand financial information at a higher level. More detail is in wrongful trading and director liability and the creditor duty of directors.

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What should the accountant advise?

ICAEW’s helpsheet on clients unable to pay says that, whether a firm continues to act or steps down, it should consider whether the client would benefit from consulting an insolvency practitioner and advise the client to seek that advice at an early stage, preferably in writing. It notes that this is not necessarily with a view to winding up, but is often useful in preventing wrongful trading.

Useful, practical advice usually covers:

getting an up to date cash flow forecast and creditor list in front of the board;
holding regular board meetings and keeping detailed minutes of what was considered and why, which ICAEW’s zone of insolvency article recommends as evidence that directors complied with their duties;
not paying one creditor in preference to others, and not moving assets out of the company;
talking to HMRC early rather than letting arrears build; see Time to Pay arrangements.

Tax debts carry extra personal risk. Schedule 13 to the Finance Act 2020 allows HMRC to make an individual jointly and severally liable for a company’s tax by a joint liability notice, in cases involving tax avoidance or evasion, or repeated insolvency and non payment, where the company is subject to an insolvency procedure or there is a serious possibility that it will be. See joint and several liability notices.

Can you still prepare the accounts on a going concern basis?

That is a decision for the directors, but the accountant cannot ignore it. Paragraph 3.8 of FRS 102 requires management to assess the entity’s ability to continue as a going concern, looking at all available information about the future for at least 12 months from the date the accounts are authorised for issue. An entity is a going concern unless management intends to liquidate it or cease trading, or has no realistic alternative but to do so. Paragraph 3.9 requires material uncertainties to be disclosed, and if the going concern basis is not used, that fact, the basis used and the reason.

ACCA’s factsheet on accounts for audit exempt companies says the accountant is not required to look for evidence that the going concern basis is appropriate, but if it becomes aware of evidence that the company may not be able to continue, it should draw the matter to the directors’ attention, explain the consequences if they are found to have continued trading knowing the company could not meet its liabilities as they fell due, and discuss the disclosures needed. If the directors refuse disclosure the accountant considers necessary for a true and fair view, the accountant considers withdrawing. ACCA’s broader principle is that members should not produce accounts, or let their names be associated with accounts, that they consider misleading. See accounts not on a going concern basis.

Where does advice end and shadow directorship begin?

A shadow director is a person in accordance with whose directions or instructions the directors are accustomed to act. Both section 251 of the Companies Act 2006 and section 251 of the Insolvency Act 1986 say a person is not a shadow director by reason only that the directors act on advice they give in a professional capacity. That protection covers advice, not control.

This is important because section 214(7) applies wrongful trading to shadow directors, and section 213 makes any persons who were knowingly parties to carrying on the business with intent to defraud creditors liable to contribute, whether or not they were directors. An accountant who chooses which suppliers get paid, signs payments, negotiates with creditors as if it were management, or tells the board what it must do rather than what its options are, is moving outside the advisory role. Keep advice in writing, put options to the board and let the board decide. See shadow and de facto directors.

What should the accountant avoid?

Acting as an insolvency practitioner. Section 389 of the Insolvency Act 1986 makes it an offence to act as an insolvency practitioner in relation to a company when not qualified to do so. Formal appointments and the advice that goes with them belong with a licensed practitioner.
Getting its own fees paid first. Under section 239 an office holder can challenge a preference: anything that puts a creditor in a better position on insolvent liquidation, where the company was influenced by a desire to do that. Section 240 sets the look back as 6 months before the onset of insolvency, or 2 years for a connected person. ICAEW’s helpsheet warns that arrangements such as standing orders for fees may create a preference, and that a firm continuing to act may join the unsecured creditors.
Holding records hostage. Section 246 makes a lien over a company’s books, papers or records unenforceable against an administrator, liquidator or provisional liquidator, except for documents giving title to property and held as such.
Helping set up a successor company carelessly. Section 216 bars a person who was a director or shadow director in the 12 months before insolvent liquidation from being involved, for 5 years, with a company using the same or a similar name, except with leave of the court or in prescribed circumstances. See phoenix companies and prohibited names.

Should the firm keep acting?

ICAEW treats this as a matter of professional judgement and says the decision and the reasons should be documented. Unpaid fees can create a self interest threat to objectivity. If the firm steps down, it should not leave the client unduly disadvantaged, for example by resigning just before a deadline. It is generally not appropriate to withhold signature or service purely to improve the firm’s bargaining position over fees.

What does this look like in practice?

Illustration only. While preparing year end accounts, a firm sees that a client company owes HMRC £40,000 of PAYE and VAT, its overdraft is at its limit and suppliers are on stop. The director asks the firm to decide which suppliers to pay to keep trading. The firm instead writes to the board setting out the section 123 tests, the wrongful trading risk and the need to treat creditors equally, recommends that the board see an insolvency practitioner that week, and lists the information the practitioner will need. It discusses a material uncertainty note with the directors, does not take a lump sum for its own outstanding fees, and records each conversation on file.

What mistakes come up most often?

Advising orally only, leaving no record that the directors were warned.
Making payment decisions for the board.
Preparing going concern accounts with no disclosure when the firm knows the company cannot pay its debts.
Securing the firm’s own fees just before an insolvency procedure.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.