Is my company insolvent?
Please note: this page is a brief, general overview to help you understand your options. It doesn’t cover every detail or every possible route, and it isn’t legal or financial advice. Every situation is different, so please talk to us before making any decisions.
In short: a company is insolvent if it can’t pay its debts when they’re due, or if it owes more than it owns.
The two tests
There are two simple tests. If your company fails either of them, it is likely to be insolvent.
- The cash flow test asks whether the company can pay its debts, such as wages, suppliers and tax, when they fall due.
- The balance sheet test asks whether everything the company owes, including loans, leases and other future commitments, is more than the value of everything it owns.
Warning signs
- Falling behind with VAT, PAYE or other payments to HMRC.
- Using the overdraft or credit cards to cover day-to-day costs.
- Suppliers asking to be paid upfront or refusing credit.
- Struggling to pay wages on time.
- County court judgments, statutory demands or letters from debt collectors.
- Directors putting in their own money just to keep going.
What directors must do
Once a company is insolvent, or close to it, the law expects directors to put the interests of creditors as a whole first. In practice, that means:
- Take advice from a licensed insolvency practitioner as early as you can.
- Don’t pay some creditors ahead of others, especially anyone connected to you, such as repaying a director’s loan or a debt you’ve personally guaranteed.
- Keep proper records and don’t sell company assets for less than they’re worth.
- Avoid running up new debts the company has no realistic chance of paying.
If you carry on trading when you knew, or should have known, that the company couldn’t avoid insolvency, and creditors lose more money as a result, you can be made personally liable for some of those losses. Getting advice early is the best protection.
What to do next
Being insolvent doesn’t always mean the end of the business. Depending on your situation, early advice, a Company Voluntary Arrangement or administration may help it survive. If it can’t be saved, a Creditors’ Voluntary Liquidation lets you close it properly.
Talk to us in confidence
Call us or send a message. The first conversation is free and there’s no obligation to go further.