Is My Company Insolvent? The Warning Signs of Business Insolvency

If you fail to act in the right way, the consequences of business insolvency can be severe, over and above the financial problems your business will experience. The potential methods of redress for continuing to trade while insolvent include fines, being made personally responsible for company debts, or even a potential disqualification from directorship.

To avoid these consequences it is essential you cease trading, notify your creditors, inform HMRC and get in touch with a turnaround practitioner at your earliest opportunity.

Limited Company Insolvency

Is Your Ltd Company on the Verge of Insolvency?

Insolvency is not an instant or immediate state. It can take weeks, months or even years for a faltering business to become insolvent The two basic methods of assessing whether your company is insolvent are as follows:

(1) Balance Sheet Test for Insolvency

Are your companies liabilities greater than your assets?

(2) Cash Flow Test for Insolvency

Do  you owe more money at any given time than you can pay? An accurate balance sheet calculation should include contingent as well as prospective liabilities.

What are the Warning Signs for Insolvency?

These include:

  • Insufficient cashflow – If your company consistently lacks the funds to cover essential operating expenses it’s simply a matter of time before it becomes insolvent.
  • Creditor pressure – Are you under pressure from creditors? A payment demand could be just around the corner if lenders, credit card companies, HMRC, mortgage providers or other creditors regularly chase you for payments. If payment is still not forthcoming, a winding up petition could be the next step.
  • Highly geared – Have you reached your maximum credit limit from lenders such as banks or suppliers? This could be a sure sign your business is on the verge of insolvency.
  • Wage commitments – A business’ inability to pay its employees is a common indicator of looming insolvency.
  • Secured finance – Be aware if you are factoring and or have a secured loan you are vulnerable to having the bank take control of your business and put in a receiver to secure their assets.

Litigation Threats and Creditor Pressure

Already mentioned but worth reiterating is that, the threat of litigation is a huge indicator that insolvency could be on the horizon. If you’ve received a County Court Judgement, Statutory Demand or Winding up Petition, this means you have creditors who are extremely anxious to get what is owed them and are now using the legal system to do so. That legal system is designed to escalate the situation to a point where those creditors can be paid, or you will have to close your limited company.

Banking and insolvency risks

There is no such thing as a friendly bank and I’m afraid a lot of the horror stories you hear or read are probably true. We have had to try and rescue solid business where the bank has simply decided for its own reasons to withdraw lending without notice. These cases are as shocking as they are often unnecessary as quite often the director sleepwalked into insolvency by allowing the banks to control the company cash-flow. Often increased charges and fees come out of the blue and you have no say in the matter. If you are small company factoring is unlikely to help your situation and is likely to make matters worse – there are alternatives to factoring.

And never, ever have your company banking and factoring with the same banking group as you are handing complete control across to a faceless individual who only has the bank’s interests at heart – not yours.

If you’re Insolvent, Seek Advice Immediately to Avoid Potential Charges of Wrongful Trading

If the following are true of your business, the likelihood is your business is already insolvent and you should cease trading and inform your creditors immediately:

  • You struggle to maintain your financial obligations and regularly make late payments to creditors and HMRC.
  • A County Court Judgement (CCJ) or statutory payment order has been made against your business.
  • The company’s liabilities are equal to or greater than the market value of the company’s assets, inclusive of equipment, buildings, money in the bank and debtors.
  • The directors or other company employees are not receiving a wage.

If the underlying issues of the insolvency are not addressed, at best your business is heading for liquidation and eventual dissolution; at worst, you could be accused of misconduct and disqualified from acting as a director of any UK company for a maximum of 15 years.

The good news is if you are a director and you are approaching insolvency or you think your company is insolvent but unsure you do get acknowledgement that you sought professional advice. If you seek assistance at the first sign of trouble, a viable business may be able to trade its way out of trouble while repaying creditors over an agreed term.

There are a wide range of potential business rescue options at your disposal to meet the specifics of your situation. Please get in touch for your free consultation.


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