Insolvency Truths: Debunking 10 Myths That Could Stop You Making the Right Decision

Molly Monks - IP at Parker Walsh
March 28, 2025

Insolvency is a complex area that many business owners misunderstand. The fear and uncertainty surrounding financial distress often lead to myths that can prevent directors from taking the right steps. By debunking these misconceptions, business owners can gain a clearer understanding of their options and make informed decisions about their company’s future.

Myth 1: Insolvency Means Automatic Business Closure

Debunked: Many assume that if a business becomes insolvent, it must shut down immediately. In reality, insolvency does not always mean the end of a business. Options like administration, Company Voluntary Arrangements (CVAs), or restructuring can allow companies to continue trading while managing their debts.

Myth 2: Directors Will Always Be Personally Liable for Business Debts

Debunked: In most cases, a limited company structure means that directors are not personally responsible for the company’s debts. However, if wrongful trading, fraudulent activities, or personal guarantees are involved, directors may face personal liability. Seeking professional advice can help mitigate risks.

Myth 3: Insolvency is a Sign of Business Failure

Debunked: Financial distress can occur for many reasons, including economic downturns, supply chain disruptions, or unexpected market changes. Many successful businesses have experienced insolvency before restructuring and returning stronger. It is not necessarily an indicator of poor management or failure.

Myth 4: Liquidation and Insolvency Are the Same Thing

Debunked: Insolvency is the financial state of being unable to meet debts, whereas liquidation is one potential outcome. Businesses in insolvency may explore recovery options like CVAs, administration, or voluntary arrangements before liquidation becomes necessary.

Myth 5: Creditors Will Immediately Shut the Business Down

Debunked: While creditors have the right to recover debts, many prefer to negotiate repayment plans rather than forcing immediate closure. A well-structured insolvency process can facilitate agreements that satisfy both creditors and business owners.

Myth 6: Entering Insolvency Means Directors Are Automatically Disqualified

Debunked: Directors can continue in business even after a company becomes insolvent, provided they have acted responsibly. Disqualification only occurs if misconduct, wrongful trading, or fraudulent activities are identified.

Myth 7: Insolvent Companies Cannot Pay Wages or Operate Normally

Debunked: In some cases, an insolvent company can continue trading if it is part of an approved recovery plan, such as administration or a CVA. Employees may also be eligible for government-backed redundancy payments if liquidation occurs.

Myth 8: Seeking Professional Insolvency Advice Makes Things Worse

Debunked: Some directors delay seeking help because they fear it will escalate the situation. However, professional insolvency practitioners can provide options and legal protections that may prevent unnecessary closures or legal actions.

Myth 9: If I Close My Business, I Can Never Start Another One

Debunked: Directors of liquidated companies can start new businesses, provided they follow legal guidelines. However, restrictions apply if they were involved in wrongful trading or wish to start a business with a similar name under the phoenix company rules.

Myth 10: Insolvency Proceedings Take Years to Complete

Debunked: The length of insolvency procedures varies depending on the complexity of the case. Some CVAs and administration processes can resolve issues within months, while liquidation can take longer depending on asset realisation and creditor claims.

Conclusion

Misinformation about insolvency can cause unnecessary stress for business owners. By understanding the realities of financial distress, directors can make informed decisions and explore viable solutions. Seeking professional advice early can help businesses navigate insolvency effectively and, in some cases, recover and thrive again.

Frequently Asked Questions

Q: How do I know if my company is insolvent?

A: A company is insolvent if it cannot pay its debts as they fall due or if liabilities exceed assets. Signs include creditor pressure, unpaid invoices, and declining cash flow.

Q: Can I avoid liquidation if my business is insolvent?

A: Yes, alternative solutions like administration or a Company Voluntary Arrangement (CVA) may allow the business to restructure and continue trading.

Q: What should I do if I suspect my business is becoming insolvent?

A: Seek professional insolvency advice as soon as possible. Early intervention increases the chances of recovery and minimises risks for directors.

Molly Monks M.I.P.A
Licensed Insolvency Practitioner at Parker Walsh

I am Molly Monks, a licensed insolvency practitioner at Parker Walsh. I have over 20 years of experience helping directors with the financial struggles they may face. I understand that it can be overwhelming and stressful, so I offer practical straightforward advice, which is also free and confidential. I spend time with directors to get a good understanding of their business and their goals, therefore providing the best tailored advice possible.

Email: molly@parkerwalsh.co.uk

Phone: 0161 546 8143

WhatsApp: 07822 012199

If you have any questions about your business, we're always happy to help. Our advice is free and confidential.
Why Choose Parker Walsh?
Dedicated Insolvency Practioner
20+ years experience
Straight forward pricing
No referrals - all in-house
Fully regulated & insured
Contact Us

Related Articles

What is an Overdrawn Director’s Loan Account (ODLA)?
An overdrawn director’s loan account occurs when directors owe money to the company. Learn what it means, how it’s recovered, and what to do if you can’t pay.
Struggling with Rising NICs? Business Solutions to Stay Afloat
From April 2025, employer NICs will rise to 15%, increasing financial pressure on businesses. Parker Walsh offers solutions like restructuring, CVAs, and administration to help companies adapt without closing. Act now for support.
The Struggles of the Second-Hand Market - What Vintage Store Owners Need to Know
Independent second-hand stores are struggling due to online resale platforms, fast fashion, and rising costs. Parker Walsh offers expert insolvency support, helping business owners explore restructuring, debt management, or liquidation options.
Company Administration vs. Liquidation - Which Is Right for Your Business?
Administration vs liquidation solutions and their pros and cons - which is best for your business?
The Role of a Director in Insolvency - Legal Responsibilities and Risks
Exploring the duties of directors when facing insolvency and how to protect themselves legally.
Article Categories
If you're worried about business debts, bills or cash-flow, we may be able to put a package together to help.
Call us today for a no obligation chat to see what options you have.
FREE IMPARTIAL ADVICE
0161 546 8143
Latest Articles
Why choose Parker Walsh?
We're one of the few companies who can handle your case entirely in-house
Many companies will take your case and pass it on to a licenced Insolvency Practitioner, like us.
Cut out the middle-man.
Our fees are clear, affordable and agreed up front, so there are no surprises.
Arrange a Call BackThe Insolvency Practitioners Association Logo
Case Studies
CONFIDENTIAL
All consultations are discreet and confidential.
NO ADVICE FEES
We don't charge for our advice. Our friendly team are available via phone or email.
NO REFERRALS
We don't pass on your details to another company. Everything is dealt with in-house

Get in touch with us on 0161 546 8143 or request a callback

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Prefer to WhatsApp? Send us a message and someone will get back to you as soon as possible!