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Is My Company Insolvent? Take This Insolvency Test

13th October, 2023
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

He has rescued hundreds of companies and helped many of them turn around using CVA or pre pack. Could he help YOUR company?! Call him now 07833 240747

Keith Steven
Is my company insolvent

Table of Contents

  • The Cashflow Test For Insolvency
  • The Balance Sheet Test
  • The Legal Action Test

We’re under a lot of pressure, but is our company insolvent?

How do you know if your company is insolvent?

A company is deemed to be insolvent if it is unable to pay its debts as and when they are due, or the value of its liabilities is larger than the total value of its assets i.e. it has a negative balance sheet.  However, having a negative balance sheet does not necessarily mean that the company will go into an insolvency process.

In order to establish if your company is insolvent you need to apply the 3 tests for insolvency that will determine if your company is viable in the future.

There are three key tests for insolvency of a UK company or LLP:

  1. The cashflow test
  2. The balance sheet test
  3. The legal actions test

The Cashflow Test For Insolvency

This is the most important insolvency test. Put simply – can the company pay its debts when they fall due?

For example, if your company is not paying the deductions from employees for NIC and PAYE across to HMRC on the 19th of the month following the month they were deducted, then the company could be insolvent.  If the company has a time to pay arrangement with HMRC or any other creditor it IS definitely insolvent.

If trade creditors sell to the company on say 30 days terms and the company regularly pays on 90+ days, then this could mean the company is insolvent.

A director has a legal requirement to understand this issue. If you believe that the company has insufficient cash to pay its liabilities on time you must take action. Note: if the company is insolvent, you as the directors must act to MAXIMISE CREDITORS INTERESTS. You should take advice quickly – don’t worry we will give you free initial advice.

Many directors tell us that “my company cannot be insolvent because HMRC allowed us to agree a long term repayment plan or TTP”. Actually the opposite is true, HMRC knows that YOUR company is insolvent but it allows a period of time to repay the debt.

The Balance Sheet Test

If the company has a negative balance sheet this means it has more liabilities (debts) than it has assets. Interestingly, the cashflow test (see above) may be passed and the company may be paying creditors on time, but it can still have a negative or insolvent balance sheet.

If your company has a negative balance sheet AND it fails the cashflow test, you should take expert advice from insolvency practitioners, quickly. Your own accountant is unlikely to have much experience of these issues, but any reputable insolvency practice will give you free initial advice on whether your company is insolvent.

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 properly if it is.

If you need advice on these issues email us at info@companyrescue.co.uk

Remember, if the company is insolvent, you as the directors must act to MAXIMISE CREDITORS INTERESTS. Failure to do so could lead to personal liability for the directors. This means that the veil of incorporation that protects you as a director, can be removed by a future liquidator and you could be compelled to pay the company’s creditors back personally.

The Legal Action Test

The legal actions test: if your company has threats of action these do not necessarily mean the company is insolvent. However if an action is filed in the Court against your company then the company does fail this test.

These legal actions point to the company’s inability to meet its liabilities. County Court Judgments, Statutory Demands and Winding up petitions are all very serious for your company. You must take advice from insolvency advisors if you have any of these actions against your company, or if a creditor is threatening to take these actions.

What are the conditions for a creditor to issue a winding up petition?

A creditor must be owed more than £750 and there must be no dispute about the debt. Since the sharp rise in  Court filing costs in 2022, it does cost quite a lot of money to file a winding up petition so, creditors need to be at the end of their patience before issuing one. BUT, be aware if a creditor issues a winding up petition you must get legal and insolvency advice immediately.

Summary of the insolvency tests:

If you believe that your company fails any of the above tests, it is vital that you and the board of directors take action to address the insolvent position. Read about the rescue options here and the closure options here  then give us a call on 0800 9700539 to speak to one of our friendly expert advisors.

REMEMBER this warning…..If the company is insolvent, you must act to MAXIMISE CREDITORS INTERESTS. Failure to do so could lead to personal liability for the company’s debts.