Is your company insolvent?

COMPANY DEBT ANALYSER

Your businesses may appear sound but in fact may be insolvent. One view is that a business becomes insolvent when it goes beyond the point of ever being able to meet all its liabilities when they are due, or pay all its creditors in full. Every situation is different. There are 3 main tests to identify business insolvency, these being the cash flow test, the balance sheet test and the legal test.
The Cash Flow Test (can the company pay its debts when they fall due for payment?)

You are not paying the deductions from employees for Income Tax and National Insurance Contributions across to the Inland Revenue on the appropriate date
Your creditors sell to you on a set number of day terms and you regularly pay on a date beyond the terms.

Directors have a legal requirement to understand the cash flow. If your company is overdue on paying creditors and has legal actions against it then you are probably insolvent. You must seek advice from an insolvency practitioner.
The Balance Sheet Test

Do you owe more money than you own?
Are the company’s assets (debtors, plant, machinery and equipment etc) exceeded by its liabilities?

Contingencies and future liabilities must be included in this test. Obsolete stock and work in progress must not be overvalued. Debtors that you know you will fail to collect will distort the balance sheet. Are you sure your accounts provide an accurate and true picture of the business finances. If you deduct obsolete stock, work in progress and uncollectable debts does the balance sheet still look healthy? You are legally required to present accounts that show a true and fair picture. If your company has a negative balance sheet it is insolvent. You must seek advice from an insolvency practitioner.
The Legal Action Test

If a creditor has obtained a County Court Judgment this may demonstrate your company’s insolvency and the creditor may petition to wind up the company.
If a creditor has obtained a Statutory Demand for a sum greater than £750 and it remains unpaid for more than 21 days, then the creditor may petition to wind up the company.

If your company has County Court Judgment’s or winding up petitions it is probably insolvent. You must seek advice from an insolvency practitioner. Unsure ring us and discuss the situation with a professional.

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