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Is your Company Insolvent?

This page has been designed to assist Directors to determine whether their company is insolvent by considering three specific tests in accordance with the Insolvency Act 1986.

Th e 3 Insolvency tests are:

1.Cashflow Test

Can the company pay its debts when they fall due?  Are you experiencing cashflow problems?

 For example if you are not paying HM Revenue & Customs for VAT and PAYE when they fall due to payment, your business could be insolvent.

If your trade creditors sell to you on say 30 days terms and you regularly pay on 60+ days,  the company could be insolvent.

A Director has fiduciary duties to both the company and its creditors and must ensure that the company is acting in the interest of these parties. If the company is trading whilst insolvent  the directors must seek independent advice.

2. Balance Sheet Test

Does the company’s total assets exceed the liabilities?

If you add up the value of the company’s assets i.e. debtors, plant and machinery, equipment etc and deduct the liabilities i.e. trade creditors, VAT / PAYE, bank loans and overdrafts etc, is the number positive or negative?

If negative, the company could be insolvent.

It is important to point out that this test should include contingent or prospective liabilities

Many directors tell us that on a balance sheet test the company is not insolvent therefore they do not need to act. However, under the cashflow test above the company may still be insolvent. So you must act if it is.

3. Legal Action Test

If a creditor has obtained a County Court Judgment or issued a Statutory Demand this may demonstrate the company’s insolvency and the creditor may petition to wind up the company. This is known as Compulsory Liquidation and would result in the company being wound up by the court.

 

If the company has failed one or more of the above tests, you must act to maximise creditors’ interests

Call Dianne or Mark on 0800 107 8788 to discuss options for your company insolvency.

 

Apply Now - Please call us for a no obligation discussion on 0800 107 8788