Is my company insolvent?

Your company is insolvent if it cannot pay its debts when they become due and/or the value of its liabilities is greater than its assets. There are two tests you can do to determine whether your company is insolvent:

• Cash flow test – Can your business pay its outgoings when they fall due? If you have outstanding tax arrears or are unable to pay your suppliers or cover debt repayments, the likelihood is that your company is insolvent.
• Balance sheet test – How do your company’s assets stack up against its liabilities? If you’re in a position where your contingent liabilities (the debts you have now and are likely to incur in the future) exceed the value of your business’s assets, your company is insolvent. 

If your company fails either of these tests, you cannot simply continue to trade in the hope that the situation will resolve itself. Instead, you should contact a licensed Insolvency Practitioner immediately. They will assess the business’s financial position and advise you on your options. 

Many licensed Insolvency Practitioners, such as the team at Scotland Liquidators, offer a free initial consultation. That enables you to get a better understanding of your position and your possible next steps without incurring further costs.

The insolvency tests are useful when confirming your company’s financial position. However, there are also multiple warning signs during the day-to-day running of your business that will indicate your company is insolvent, including:

• Receiving repeated payment demands from multiple creditors. That may start as emails and phone calls but can quickly escalate to Statutory Demands and County Court Judgments (known as a decree in Scotland).
• Not taking a salary from a business and struggling to pay staff wages. If employee wages go unpaid, your company is technically insolvent. 
• Reaching the maximum limit on your overdraft and not having the assets or financial stability to access further borrowing. 
• Struggling to keep up with your financial obligations and regularly making late or incomplete payments to creditors such as suppliers and HMRC. 
• Not being able to cover basic operating expenses, such as utility bills, office supplies and marketing fees, or run the business effectively.

When your business is insolvent, your legal duty as a company director switches from promoting the company’s success for its shareholders to protecting your creditors from further losses. The best way to do that is to seek the advice of an Insolvency Practitioner. They will assess your position, talk you through your options and explain the steps you can take to avoid adverse personal consequences.

It’s often the case that an insolvent company has to cease trading immediately to prevent it from accruing further debts it cannot repay. However, the Insolvency Practitioner may advise you to keep trading for a short time if it is beneficial to your creditors. 

Crucially, insolvency does not necessarily spell the end for your business. There are informal company rescue methods that may be appropriate, such as seeking alternative funding or negotiating repayment agreements with your creditors.

There are also several formal insolvency options. Company Voluntary Arrangement may be suitable if your business is viable but creditors are threatening legal action, while Company Administration aims to return the company to profitability via restructuring.

If the company is no longer viable, you can enter into liquidation voluntarily via a process called Creditors’ Voluntary Liquidation (CVL). A liquidator will sell the company’s assets to repay its creditors as far as possible, any remaining debts will be written off and the business will be removed from the official register.

If you think your company is insolvent, contact the team at Scotland Liquidators immediately. We provide a free, no-obligation consultation to help you understand your position and guide you through your options. Get in touch for free advice or arrange a meeting at one of our five offices in Scotland.