Does the UK Need a Dedicated Insolvency Process for Small BusinessesPosted: Aug 18, 2026

The Insolvency Service’s Annual Plan for 2026–27 includes a commitment to begin developing proposals that will make it quicker and easier for small and medium-sized businesses (SMEs) to deal with financial difficulty. However, adapting procedures designed for larger companies may not deliver affordable rescue, fair creditor returns or timely intervention for SMEs.

The question is really whether the current system is suitable for small businesses.

Small businesses have changed

The business of being a business has changed a lot since the current insolvency practice was developed. One of the practical difficulties we increasingly encounter as Insolvency Practitioners, for example, is that many small companies reach financial distress with very few assets.

That does not necessarily mean they never operated a viable business. Far from it.

It more reflects the way modern companies are structured. Vehicles, machinery, IT equipment and even premises are often leased. Outstanding invoices may be subject to factoring or invoice finance arrangements. Other assets may be intangible or have little resale value outside the company. By the time the business needs formal insolvency advice, there may be little or nothing left that can be realised.

This creates a difficult contradiction. Insolvency is, quite rightly, a heavily regulated profession and here at Smart Business Recovery we are in total support of that regulation. An insolvency practitioner must therefore complete the required investigations, reports, notices and administrative work. However, that work has a cost, and many of those costs remain whether the company is a substantial corporate organisation or a small business with a director and a couple of employees.

Some recovery and restructuring procedures are therefore technically available to small businesses but simply too expensive to use in practice.

A rescue process that a small company cannot afford is not really an accessible rescue process.

The same rules, but very different businesses

Directors of small companies often tell us that they feel overwhelmed by the information required to begin an insolvency or restructuring process. We do our best, and our website is full of information to help directors facing this problem, but we are one voice in a lot of often very technical noise.

The issue with making this process easier is that the information has a purpose. An insolvency practitioner needs to understand the company’s position. They must also consider the conduct of the directors, and whether anything has happened that requires further investigation.

None of that should simply be removed for very good reasons.

However, we should ask whether every element of the process needs to be applied in exactly the same way to every company. Many of the core reporting and compliance requirements do not reduce simply because the company is very small or its financial affairs are relatively straightforward.

For example, if it’s obvious in a small liquidation process that no dividend is likely to be paid to creditors, is there any merit in completing detailed reports, either on the anniversary as required by the rules, or as part of the final report? That report generally tells them the same thing they were told at the beginning – that it is still unlikely they are going to be paid a dividend. My first boss said that all creditors are interested in is, ‘is there likely to be a dividend, if so when and how much’. I suspect that 36 years later the same is still true, but this is usually now buried in a report that can be 25 pages long.

There is already a proportionality elsewhere in company regulations; micro accounts spring to mind as an example. So, should we apply a similar principle to straightforward small-company liquidations?

A reduced reporting framework perhaps for a small Creditors’ Voluntary Liquidation where the company falls below defined thresholds and no misconduct is evident?

That would not mean abandoning scrutiny. It could perhaps mean starting with a proportionate process, with the ability to move into a more detailed investigation when warning signs are identified.

The balance would, undoubtedly, be the tricky part.

Would simpler insolvency procedures rescue more companies?

This is not an easy question. Possibly it would, but we need to be realistic.

Simplifying procedures and reducing costs could make formal options available to more small businesses. It could also help directors understand their choices and engage with the process instead of feeling overwhelmed by it.

However, changing the procedure will not solve the biggest barrier to business rescue: directors seeking advice too late.

We regularly see directors continue trading in the hope that sales will improve, a major customer will pay, new finance will arrive or the next few months will somehow be better.

The problem is that hope is not a turnaround strategy.

By the time some directors ask for help, cash reserves have disappeared, tax arrears have increased, supplier relationships have deteriorated, and any remaining assets may already be tied to finance arrangements. At that stage, the realistic choices can be very limited.

Again, better guidance and clearer access to advice would certainly help, and again, we have made some of our own experience available on our website.

Early advice may reveal opportunities to refinance, restructure, negotiate with creditors or make operational changes. Waiting until a creditor forces the issue makes rescue much more difficult.

How that message is incorporated into and change proposed is where the problem lies.

Accountability must remain part of the process

Any proposal for a simplified small-business procedure will understandably raise questions about scrutiny and abuse. Directors who have acted improperly should still face recovery action or disqualification where the evidence supports it.

During the past six years, a significant amount of enforcement attention has understandably focused on the misuse of Covid loans and other pandemic support. These cases are likely to remain part of the insolvency landscape for several more years.

Eventually, however, Covid-related misconduct will stop being the dominant issue. We then need to ask what future director investigations should prioritise.

The important factor here is “evidence”. Entrepreneurs take risks, economic conditions change, and otherwise responsible businesses sometimes fail. That is not evidence of any improper actions.

Whatever the changes, an effective system must still be fair, and that means being capable of distinguishing honest commercial failure from deliberate abuse.

What should a small-business insolvency process achieve?

A dedicated or simplified process should not, and probably logistically speaking, cannot, merely be a low-cost version of liquidation. It should be designed around the realities of modern small businesses, understanding of where streamlining processes means opening the door to abuse and where the lines must be drawn regardless of cost.

It should work towards:

• Clearer information for directors.
• Earlier access to qualified and regulated advice.
• Reflecting the company’s size, assets and complexity.
• A clear route into fuller investigation needed.
• Appropriate protection for creditors.
• A realistic opportunity to rescue the underlying business if that is a viable option.

Above all, these reforms should recognise that an SME is not a large corporate and will often have no assets, less management support and limited access to finance.

Crucially, any change should accept the reality that it is often a sole or small number of directors who are personally dealing with every aspect of the crisis without prior understanding or experience.

That means they will need access to the people who do understand and do have the experience to help them.

Proportionality without sacrificing protection

Does the UK need a dedicated insolvency process for small businesses?

Well, I am not going to commit either way on this until we know more, but I think there is a strong case for investigating a much more proportionate version of the existing framework.

We should not remove necessary regulation, weaken director accountability or reduce creditor protection. However, neither can we have a system in which the cost and complexity of the available procedures prevent small businesses from using them.

The objective should be proportionate scrutiny, not reduced responsibility.

At the same time, we should not pretend that procedural change alone will all at once save 100s of now suddenly viable businesses. Earlier advice, better director education and a willingness to confront financial problems remain essential, and they are hard to address.

So, putting the high concept and honest desire to improve aside for a moment, yes, a simpler system could open the door, but directors still need to walk through it before it is too late if we are to save more businesses. Where we can’t, then a simpler, easier and more appropriate insolvency system for smaller SME businesses sounds wonderful; whether it is practical or possible remains to be seen.

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