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Is your company insolvent? Take our insolvency test for directors

Licensed UK Insolvency Practitioners FREE Meeting for Company Directors

We can help with serious company debts, HMRC and creditor pressure, VAT/PAYE/Tax arrears, cashflow problems and raising finance.

Is your company insolvent? Take our insolvency test for directors

Reviewed: 3rd June 2016

It can be difficult to judge whether a company is actually insolvent, or is just experiencing a temporary lull. One of your duties as a director, however, is to understand the company’s financial situation, and act to maximise the interests of creditors if insolvency is suspected.

If you think your company’s financial problems are serious, you can apply three tests to assess how bad the situation really is, and then take appropriate action:

  • Cash flow test
  • Balance sheet test
  • Legal action test

If you are insolvent and don’t put creditor interests first, there’s a risk of being personally liable for company debts. Finding out for certain is an important step, so we’ve put together a check list of items to help you establish your position:   

Cash flow test

  • Do you regularly pay your suppliers late?
    Do you offer much longer payment terms for your own customers than you have with your suppliers – 90 days as opposed to 30 days, for example? If so, it’s highly likely that cash flow will be a big problem at some point.
  • Are your HMRC liabilities falling behind?
    Although Real Time Information means that payments are sent with the payroll, there may be a backlog of late or missed tax/National Insurance payments.
  • Can you pay your staff?
    This is a crucial question – if can’t even pay your employees, it’s likely that the company is already insolvent.

Balance sheet test

  • Do business assets exceed liabilities?
    Check the value of your business assets and liabilities. Assets should exceed liabilities - if they don’t, it could mean that you are insolvent.
  • Have some of your assets been over-valued?
    Even if it appears from the balance sheet that you are solvent, it’s worthwhile asking a financial expert to double check all the figures. Unfortunately, the result may not look so healthy if some of the assets have been over-valued – for example, stock that needs to be sold at a reduced price, or if the business is carrying more bad debt than you first realised.
  • Are there any contingent liabilities that haven’t been accounted for?
    Contingent liabilities are those that could materialise in the future. They include court judgements and unresolved claims against the company.

Legal test

  • Is a creditor trying to obtain a County Court Judgement (CCJ) against you?
    If a CCJ is not paid, the courts might decide to investigate your company’s financial status further, which could lead to insolvency if you’re unable to pay what you owe.
  • Have you received a statutory demand for payment?
    If you’ve received a 21-day statutory demand for payment, it’s likely to be followed by a winding-up petition if you don’t pay. Statutory demands can be sent if the debt is over £750, and non-payment brings the debt into existence in law.
  • Do you owe more than £750 to any one creditor?
    Any long-standing debt over £750 increases your exposure to legal action. HMRC are known to take this type of action quickly to recover arrears of income tax, VAT, and National Insurance contributions.

What can you do if you’re insolvent?

If you fail one or more of these tests, you may be able to negotiate a repayment plan with your creditors. Alternatively, a Company Voluntary Arrangement (CVA) might be suitable. If you meet the criteria, a CVA would allow you to trade your way out of difficulty whilst repaying existing debt at an affordable rate.

Clearly, there’s a heavy reliance on professional valuations when judging balance sheet insolvency, and if the situation looks bleak you should consult an insolvency expert. You need to act quickly to minimise your risk of wrongful trading,

Real Business Rescue offers professional assistance in this respect. If you’re worried about cash flow, fear that you’re on the borderline of insolvency, or have already established that you can no longer pay your bills, call one of the team for a same-day consultation. We have 55 offices around the country.

Who we help

  • Company Directors
  • Finance Directors
  • Sole Traders
  • Accountants
  • Small Businesses
  • Large Businesses
  • Partnerships

Contact our team

Jonathan Munnery
Andrew MacKenzie
Julie Palmer
Thomas Mckay
Keith Tully
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