Insolvency Test Meaning
The most common way of testing whether your business is insolvent is by using 1 or more of the methods detailed below. We always also recommend speaking with an experienced insolvency professional. This is a servuce we provide free of charge so please do get in contact.
The three checks that the insolvency test covers are as follows:
- The cash-flow test.
- The balance sheet test.
- The legal action test.
Cash-flow Insolvency Test
The cash-flow test is designed to find out whether a business can pay its bills when they fall due.
This test isn’t simply about can you pay your bills at this exact moment, either. The legal requirement is that you are able to pay your bills in the ‘in the reasonably near future.’
What Qualifies as Insolvency? – If your business cannot pay its bills on time, the chances are that it is mostly likely insolvent.
Balance Sheet Insolvency Test
This part of the test aims to determine whether the value of the business’ cash at the bank, as well as the total value of assets combined, are more or less in value than the total value of liabilities that the business has.
The balance sheet test is one you will ideally look at in conjunction with your accountant as these figures must be accurately and clearly represented.
What qualifies as insolvency? – If the total value of assets and cash combined has a value that is less than the total value of liabilities under the business name, chances are, it is insolvent.
The Legal Action Insolvency Test
The final part of the test aims to highlight whether any legal action has been taken out against the business for any debt to the value of £750 or more.
This refers specifically to Statutory Demands, or County Court Judgements, both of which are the classic precedents to a winding-up procedure.
What qualifies as insolvency? – If your business has had legal action set against it of this value of the debt or greater, your business may be insolvent.
Use our Insolvency Test Calculator
Use the free calculator above.
Or for more information on what to do if your business is insolvent contact us on 0800 074 6757, or you can email us at email@example.com or use the live chat feature.