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Insolvency definition What does Insolvency mean? In practice, insolvency describes a financial state where a debtor cannot meet liabilities when due, triggering remedies such as administration, liquidation or bankruptcy and informing directors’ duties and avoidance claims. For companies in England & Wales, Scotland and Northern Ireland, the Insolvency Act 1986, s 123 sets two alternative tests: - Cash‑flow insolvency: an inability to pay debts as they fall due. The inquiry is practical and forward‑looking, not confined to today’s bills (Re Patrick & Lyon Ltd [1933] Ch 786; BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28). - Balance‑sheet insolvency: liabilities (including contingent and prospective liabilities) exceed assets on...
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Dealing with financially distressed trading partners: options for trade creditors including termination, ipso facto restrictions, renegotiation, retention of title, debt recovery, proving debts, and continuing to trade during insolvency
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Practice notes
This Practice Note sets out the issues a creditor faces when dealing with a trading partner that owes sums or is experiencing financial difficulty or formal insolvency. It highlights contractual and commercial routes, practical debt-recovery measures, and guidance on safeguarding the creditor’s position during an insolvency process.
Spotting the warning signs
In practice, trade creditors are frequently the last to discover that a company they supply is under financial strain. Assessing whether the reassurance that 'the cheque is in the post' is genuine, or concealing a wider difficulty, is not straightforward. While the published accounts of major listed companies can be accessible and contain extensive information—some mandated and some volunteered—the financial statements within them largely describe historic performance. By contrast, a company’s management accounts are typically the more insightful resource, as they include forward-looking estimates and forecasts of income, expenditure and profitability, broken down, for instance, by specific products and services, markets and customers. Nevertheless, a trade creditor is very unlikely to be granted access to those records. Such published material, however comprehensive, remains a backward-looking snapshot of performance. The forward focus of management accounts would be more revealing, yet suppliers rarely, if ever, see that level of detail internally...
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Web page updated on 21/05/2026
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