Is My Company Insolvent? How To Check & The Next Steps To Take

business director looking at laptop and documents

If you’re noticing mounting debts and cash flow problems, then you may be wondering “is my company insolvent”. It’s important to identify whether or not your business is in fact insolvent to ensure you are meeting your obligations as a director. In order to act in the interests of creditors, the business may need to be liquidated, however, in some cases it may be possible to recover the business. Either way, it’s important to react to problems quickly in order to put yourself in the best possible position for moving forward. 

There is a difference between a company that’s insolvent and a company that’s just going through a sticky patch. For clarification, a company is considered “insolvent” if they have more liabilities than assets, meaning that they cannot pay their debts as and when they fall due. Insolvency is usually something that creeps up on a company slowly, rather than suddenly. If you’re wondering “is my company insolvent”, these are a few of the key signs to look out for:

  • Cash flow problems
  • Pressure from creditors
  • Maximum borrowing limits reached
  • Mounting debts due to HMRC
  • Late payment interests and charges

If you’ve noticed any of these signs, how can you determine “is my company insolvent”. There are 3 tests you can use to check. These are:

Balance Sheet Test

The balance sheet test is used to determine if a business has greater assets than liabilities or vice versa. The test takes into account all the company’s assets in detail and places them against all of the company’s debts, including contingent and prospective liabilities. If the comparison shows that the company has more debts than assets, this means that they are technically insolvent, and should consult the advice of a licensed insolvency practitioner – We’ll touch on this in more detail in just a second.

Cash Flow Test

Balance sheet insolvency describes when a company’s liabilities outweighs its assets, however cash flow insolvency is slightly different. A business is considered cash flow insolvent when they do not have enough cash to meet demand for payments. In many cases, a company may be asset rich but cash poor. Cash flow insolvency is slightly harder to test for. A cash flow test can be used to identify if a company cannot pay its debts as they fall due or in the ‘reasonably near future’, however this is more difficult to gauge accurately.

Legal Action Test

If you’re asking the question “is my company insolvent” then you should also identify  if any legal action has been taken against the company for debts of £750 or more. This includes the likes of Statutory Demands or County Court Judgements which are often precursors to winding up proceedings. 

My Company Is Insolvent. What Do I Do?

If you think that your company may be insolvent, you should seek the advice of a licensed insolvency practitioner as soon as possible. They will be able to confirm for certain whether or not your business is in fact insolvent, and advise you on the steps to take from there. In the case of insolvency, the best option may be liquidation, however in some instances, it may be possible to initiate a business rescue plan. 

If you are questioning “is my company insolvent” or have any concerns about your business’ financial situation, please don’t hesitate to contact our experienced team of insolvency practitioners for confidential advice.

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