When is a company insolvent and when should it seek company debt advice?

When is a company insolvent and when should it seek company debt advice?

To answer the question “When is a Company Insolvent?” we need to look at the outcome of two tests.

A Company is Insolvent if:

It does not have enough assets to cover its debts; that means the value of its assets are less than the amount of its liabilities

This can be tested by looking at the company’s accounts and adding up all the book values of company’s assets detailed in the accounts. This will include the physical assets such as plant and equipment, cash at bank, debtors (people that owe the company money) etc. and also non-physical assets such as goodwill.

Next, deduct the value of all the money the company owes to others, both now and in the future. The money that the company owes must also include any money that you may have put into the company to help fund the company.

If the answer is positive then the test is passed. If the figure is negative then technically the company is insolvent.

It is unable to pay its debts as and when they fall due.

The second test looks at whether a company can pay money it owes now.

Some companies will have many assets but it cannot spend these assets. For example a company may own a property or a very large piece of expensive machinery but these cannot be used to pay a supplier that is owed £2,000 tomorrow. A company must have assets that it can use to pay its debts, which really means cash.

The way to test this is to look at all the money the company will have to pay out in say the next thirty days and compare this to what cash the company will have access to in the same period. If there is not enough cash to pay everybody on time, then the company has failed the test and therefore, technically, the company is insolvent.

Business Debt

With both of these tests, the answer obtained is just the first stage of understanding the solvency position of a company. There are many other matters that need to be considered and each situation is unique.

What these tests do, however, is put a director on notice that further advice is required and that they should be seeking help by talking to an expert. If a director allows a company to continue to trade with knowledge of insolvency then if the company should fail in the future, the director may become personally liable for some or all of the debts of the company.

At The UK Company Insolvency Helpline we have the experience and the expertise to provide you with no-nonsense and clear advice about any financial difficulties you may be facing. 

My company is insolvency – what can I do? Unfortunately many company directors are faced with the question “My Company is Insolvent What Can I Do?”

What is Insolvency?

Insolvency of a company can take two forms. The first is that its liabilities or debts are greater than the assets it owns when you look at the balance sheet and secondly the company cannot pay its debts as and when they fall due.

What is my Position as a Director?

If your company is in this position as a director you have certain responsibilities and you must act correctly if you do not want to find yourself possibly being personally liable for the debts of your company or maybe being disqualified from acting as a company director in the future.

What should I do?

As soon as you realise that your company might be insolvent you should not allow your company to incur any more credit, which it may not be able to pay for in the future. As a director you are allowed a short period of time to seek advice and consider how you are going to deal with the situation but during this period anything the company buys should pay for. Remember if you write out a cheque, be certain that there is enough money in the bank for the cheque to clear.

Should I talk to an Insolvency Practitioner?

Without doubt the best advice is to make contact with a licenced insolvency practitioner. You can easily check whether the person you contact is licensed by looking them up on the internet. Do not be fooled by any other qualifications. If it does not say that they are licenced to act as an insolvency practitioner then they aren’t.

Any reputable licensed insolvency practitioner will be pleased to meet with you for an initial discussion free of charge. At the meeting you will start to understand what you should and should not do and what options are available to you.

Get Advice – What are a Director’s options?

Just because you think your company is insolvent it doesn’t mean that this is the end of the road. At The UK Company Insolvency Helpline we will look at the financial position of your company and then advise you on what you can and cannot do. There may be an opportunity to refinance the company, which will enable you to carry on.

If refinancing is not an option, we will recommend the best insolvency procedure to suit you. In many cases when we have helped directors, they have been able to buy back the business and assets of the old company and continue trading.

At UK Company Insolvency Helpline we are very aware that a director starting again can upset creditors and therefore we make sure that the advice we give you is open and transparent and creditors understand that the outcome is the best that could have been achieved in the circumstances.

What about my employees?

If a director does decided to put their company through an insolvency process, there is always concern about the employees. Remember, there is nothing to stop employees of the old company working for the new company and it may give the opportunity to make redundancies that the old company could not afford. This sort of question is what will be explained to you if you speak to an Insolvency Practitioner.