We're under lot's of pressure, but is our company insolvent?
How can I tell and what is insolvency?"

The Cashflow Test for insolvency

Simply - can the company pay its debts when they fall due for payment?

For example if you are not paying the deductions from employees for NIC and Income Tax across to the Inland Revenue on the 19th of the month following the month they were deducted, then the company could be insolvent.

If your trade creditors sell to you on say 30 days terms and you regularly pay on 90+ days, then the company could be insolvent.

A director has a legal requirement to understand this issue. If he or she believes that the company has insufficient cash to pay its liabilities on time then they must take advice/action.

The Balance Sheet Test for insolvency

Simply - do you owe more than you own as a company or are the company's assets exceeded by its liabilities? If yes, then the company could be insolvent.

It is important to point out that this test should include contingent or prospective liabilities. (If you need advice on these issues email us).

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.

In our experience an apparently solvent balance sheet may include items that are overstated, such as obsolete stock and work in progress, or debtors that are not really collectable. After deducting these items many balance sheets become insolvent. So be prudent - you are legally required to present accounts to show a true and fair picture of the business.

The Legal Action Test for insolvency

If a creditor has obtained a County Court Judgment, this may demonstrate the company's insolvency and the creditor may petition to wind up the company. (See compulsory liquidation).

If a creditor has obtained a statutory demand for greater than £750 and it remains unpaid for more than 21 days, then the creditor may petition to wind up the company. (See compulsory liquidation).

If you believe that any of the above tests are positive for your business, it is vital that you and the board of directors take action to address the insolvent position. However, don't panic, look carefully at all pertinent issues and consider the rest of this website.

Remember, if the company is insolvent you must act to maximise creditors interests. If there is no reasonable prospect of the following happening:

• New or additional capital or finance being introduced to the business to return the balance sheet to a solvent position or to remove the cashflow pressures.
• A sale or acquisition of the company
• A company voluntary arrangement or administration

then the directors may be accused of wrongful trading. If you are worried about this or your accountant has said he/she is concerned then look carefully at directors disqualification.