Updated: 6th January 2021
When a limited company experiences financial decline and insolvency becomes likely, it’s important for directors to act in accordance with insolvency laws by placing creditor interests first.
Failing to do so leaves them open to allegations of wrongful trading or misconduct. So when a Financial Director believes insolvency is suggested, based on the company’s accounts, the first step is to take professional advice.
A number of key considerations arise when a company is approaching insolvency, including:
A licensed insolvency practitioner (IP) can establish beyond doubt the company’s financial status, and identify all potential options. Furthermore, in seeking professional advice directors demonstrate responsibility, and carry out their duty of care to company creditors.
Two main tests for insolvency exist - the cash flow and balance sheet tests. The cash flow test identifies whether or not the company can pay its bills as they fall due – if not, the company is known as cash flow insolvent.
The balance sheet test involves calculating whether the company’s total liabilities (including contingent and prospective liabilities) exceed its assets. In this case, to provide an accurate result, all liabilities must be included in the calculation.
Although Financial Directors may already have carried out these tests, obtaining confirmation of the company’s financial situation from a licensed IP provides clarity on what to do next.
Having identified that the company may be entering insolvency, the Finance Director and other officers of the company must take steps to prevent further financial loss, avoiding actions that compromise creditor returns.
If your company is experiencing financial decline and you require professional assistance, our licensed insolvency practitioners at Real Business Rescue can help. We have extensive experience across all industries, and will arrange a free same-day meeting to discuss your needs. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 100 UK offices or a place of your convenience.
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