Business rescue finance: the rules before a struggling company borrows

If your company may not be able to pay its debts, speak to a Licensed Insolvency Practitioner before you take on any new borrowing. Under section 214 of the Insolvency Act 1986, if a company goes into insolvent liquidation and a director "knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration", the court can order that director to contribute to the company's assets. A director has a defence only if they took "every step with a view to minimising the potential loss to the company's creditors" that they ought to have taken (section 214(3)). Our wrongful trading page explains the test in more detail.

Your duties also change. A director's duty to promote the success of the company has effect "subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company" (Companies Act 2006, section 172(3)). You can search the official register of licensed practitioners on GOV.UK, and our guide on how to choose an insolvency practitioner explains what to ask.

A moratorium under Part A1 of the Insolvency Act 1986 limits new borrowing. During a moratorium, "the company may not obtain credit to the extent of £500 or more from a person unless the person has been informed that a moratorium is in force" (Insolvency Act 1986, section A25). Under the same section, credit includes hire purchase and being paid in advance for goods or services, and breaking the rule is an offence by the company and by any officer who, without reasonable excuse, allowed it.

The company "may grant security over its property only if the monitor consents", and the monitor can only agree if they think the security "will support the rescue of the company as a going concern" (section A26). The monitor must be a person qualified to act as an insolvency practitioner (section A6 and section A54), so any secured borrowing during a moratorium goes through them.

The British Business Bank describes the main types in its guide Making business finance work for you:

• Invoice finance uses unpaid invoices "as security against lending". With factoring, the provider "offers up to 90% of the value of an invoice and collects payment from the customer". Invoice discounting is similar, "but you keep control of customer payments". The guide also says invoice finance "is usually only available for established businesses that trade with other businesses".
• Asset finance lets a business acquire equipment or vehicles, "but the finance is secured on the asset, therefore if you are unable to meet the repayments the asset could be taken back by the lender".

We do not arrange finance or refer anyone to a lender or broker.

The Insolvency Service's guidance Starting again says a former director of an insolvent company can start another one "if you are not bankrupt or disqualified from acting as a director". It sets out three points that affect a new company's money from day one:

• Assets. To use anything the closed company owned, "you should speak to the closed company's Liquidator or Administrator". Even if you think an asset is worth little, "it must still be properly transferred over to the new company".
• Tax deposits. "HMRC may require a new company to pay a cash deposit or bond where they believe there is a risk of non-payment of tax." HMRC's page on tax deposits and bonds says it can keep a PAYE and National Insurance security for 2 years, and a VAT security for 12 months on monthly returns or 2 years on quarterly returns. The same HMRC page says it is a criminal offence to make VAT taxable supplies without giving the security in full.
• Staff. The same guidance says to take advice from the liquidator or administrator, because employees' rights "may be protected by TUPE".

Under section 216 of the Insolvency Act 1986, anyone who was a director in the 12 months before an insolvent liquidation must not use the same or a similar name for 5 years, except with the court's permission or in prescribed cases. Breaking this is a criminal offence. Our phoenix company page covers the exceptions.

If the business is sold out of administration to people connected to the company, extra rules apply. Under regulation 3 of the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, an administrator must not sell all or a substantial part of the business or assets to a connected person in the first 8 weeks of the administration unless the creditors approve it or a qualifying report from an evaluator has been obtained (regulation 6). Any funding for that purchase has to fit around this process. Our pre-pack administration page explains the steps.

HMRC may let a company pay in instalments. "HMRC will check if a payment plan is affordable for you. If you cannot agree a payment plan with them, they'll ask you to pay the amount you owe in full" (GOV.UK, If you cannot pay your tax bill on time). Our Time to Pay page explains how to ask. Talking to HMRC early costs nothing and does not add new debt.

The funding side: phoenix company finance rules, invoice finance during a CVA or administration and HMRC arrears funding options, plus illustrative case studies showing how the pieces fit together. The legal spine sits on our core pages: phoenix companies and the name rules, pre-pack administration and wrongful trading.

LTD Turnaround is an independent information service. We do not provide legal, insolvency or financial advice. Insolvency questions are reviewed by our own editorial desk, which will point you to a Licensed Insolvency Practitioner where that is the right route. We do not lend, arrange finance or refer anyone to a lender or broker, and no lender, broker or practitioner pays us anything.

Reusing a company name, buying assets from a company you were a director of, or taking on new borrowing while the company is insolvent can carry criminal and personal liability risk. Before acting, take advice from a Licensed Insolvency Practitioner and, where a company name or disqualification question is involved, a solicitor.