There are two statutory tests for insolvency under UK law, and your company only needs to fail one of them to be insolvent.
If you are reading this page because you suspect your company might be, there is a good chance it already is.
We say this because most directors do not check until the symptoms are obvious: creditors calling daily, HMRC sending statutory demands, staff wages delayed. By that point, the company has usually been insolvent for weeks or months.
The tests below give you a formal way to assess the position. They take 10 minutes and require nothing more than your latest management accounts and a list of what you owe.
The answer matters, because the moment your company is insolvent, your duties as a director shift from serving shareholders to protecting creditors, and every decision you make from that point will be examined by a liquidator if the company eventually enters formal insolvency.
Quick Answer: The Two Statutory Insolvency Tests
Section 123 of the Insolvency Act 1986 sets out two tests. Failing either one means your company is insolvent.
The cash-flow test. Can the company pay its debts as they fall due? If you are juggling creditors, delaying HMRC, relying on next month’s revenue to cover this month’s obligations, or choosing which bills to pay each week, you are likely failing this test.
The balance-sheet test. Do the company’s total liabilities exceed its total assets, including contingent and prospective liabilities? This includes debts that have not yet been invoiced (pending tax returns, potential warranty claims, dilapidation provisions on leases) and debts that might crystallise (contingent liabilities from guarantees or disputes).
We stress the “either test” point because directors often assume both must fail. They do not. A company that can pay its debts this week but has liabilities exceeding assets is insolvent on the balance-sheet test. A company with a healthy balance sheet but no cash to pay next month’s wages is insolvent on the cash-flow test.
How to Run the Cash-Flow Insolvency Test
This is the practical test that matters most in the real world. It asks whether you can pay your debts when they are due, not whether you will be able to pay them eventually.
Step 1: List every debt that is currently due or overdue. Include supplier invoices past their payment date, HMRC liabilities (VAT, PAYE, Corporation Tax) past their deadline, rent, loan repayments, and any other obligations that have already fallen due. Be honest. Include the ones you have been ignoring.
Step 2: List every debt that will fall due in the next 3 months. Include upcoming supplier payments, HMRC deadlines, payroll, rent, loan instalments, and any other recurring obligations.
Step 3: Compare against available cash and confirmed receivables. Can you cover Steps 1 and 2 from the money you have now plus the money you are confident of receiving? Not hopeful of receiving. Confident. If the answer is no, you are failing the cash-flow test.
We find that most directors who run this test honestly already know the answer before they finish Step 1. If you have overdue HMRC debts, suppliers on stop, or staff being paid late, the test is already failed. The exercise confirms what you already suspect.
How to Run the Balance-Sheet Insolvency Test
This test compares total assets against total liabilities. It is more formal and requires accurate accounts.
Step 1: Total your assets. Include cash in the bank, trade debtors (at realistic recovery value, not face value), stock (at net realisable value, not cost), property, equipment, vehicles, and any other assets the company owns.
Step 2: Total your liabilities. Include trade creditors, HMRC debts (including unpaid VAT, PAYE, Corporation Tax), bank loans, director’s loan accounts (if the company owes the director), lease obligations, hire purchase, and any contingent or prospective liabilities.
We stress the contingent liabilities because they are the ones directors forget: pending legal claims, warranty obligations, dilapidation provisions on leased premises, and deferred consideration from past transactions.
Step 3: Compare. If total liabilities exceed total assets, the company fails the balance-sheet test.
We advise getting your accountant to run this test formally if the result is close. A back-of-envelope calculation may miss contingent liabilities that tip the balance. The liquidator will run the same test using the company’s actual records, and their conclusion needs to match yours.
Warning Signs That Your Company Is Insolvent
Before you run the formal tests, these practical signals usually indicate insolvency:
You are choosing which creditors to pay each month. Creditor triage is the clearest sign of cash-flow insolvency.
You are funding the business from personal savings. The business cannot sustain itself from its own operations.
Suppliers have put you on stop or cash-on-delivery. They have lost confidence in your ability to pay.
Staff are being paid late. If you cannot make payroll on time, the cash-flow test is failed.
You have received a statutory demand or county court claim. A creditor has escalated beyond letters.
Your accountant has expressed concern. If the person who sees your numbers says the position is unsustainable, listen.
We tell directors: if three or more of these apply, you are almost certainly insolvent. Run the formal tests to confirm, but do not wait for the confirmation to seek professional advice.
What Happens When Your Company Is Insolvent
Insolvency is not a legal process. It is a financial state. A company can be insolvent and still trading. But the moment insolvency is established, your duties as a director change.
Your duty shifts to creditors. You must act in creditors’ interests, not shareholders’ interests. Every decision must prioritise minimising creditor losses.
Wrongful trading exposure begins. Section 214 of the Insolvency Act applies from the moment you knew, or should have known, that insolvent liquidation was unavoidable. The clock is running.
Selective payments become preferences. Paying one creditor ahead of others creates preference risk under section 239.
New debts are scrutinised. Every debt you incur from this point forward will be examined by the liquidator.
We are direct: insolvency is not the end. It is the point at which your options narrow and your personal exposure begins to accumulate.
The earlier you recognise it, the more options you have. A director who identifies insolvency in week 1 and seeks advice has five routes available. A director who identifies it in month 6 after a creditor petition has two.
What to Do When Your Company Is Insolvent
Run both tests. Cash-flow and balance-sheet. Be honest about the numbers.
If either test fails, seek professional advice immediately. A licensed insolvency practitioner can confirm the position and explain your options.
Do not continue trading as normal. If the company is insolvent, every decision you make is scrutinised later. Act on advice, not on hope.
Do not make selective payments. Pay normal operating expenses only. Do not settle favoured creditors or repay your own loan account.
Company Debt connects directors with licensed insolvency practitioners who can formally assess your company’s solvency position. A free, confidential consultation will tell you exactly where you stand and what your next steps should be.
FAQs on Checking If Your Company Is Insolvent
Does my company need to fail both insolvency tests?
No. Failing either the cash-flow test or the balance-sheet test means the company is insolvent. You do not need to fail both. Most companies that are struggling fail the cash-flow test first (they cannot pay debts as they fall due) even if their balance sheet still looks healthy on paper.
Can my company trade while insolvent?
There is no law against trading while insolvent. But from the moment insolvency is probable, your duties change and wrongful trading exposure under section 214 begins to accumulate. You can continue trading if you are taking steps to minimise creditor losses and acting on professional advice. You cannot continue trading while ignoring the problem and hoping it resolves itself.
Who decides if a company is insolvent?
The directors should assess solvency on an ongoing basis. A licensed insolvency practitioner can provide a formal assessment. In disputed cases, the court makes the final determination based on the statutory tests. In practice, if the cash-flow test or balance-sheet test is clearly failed, the conclusion is straightforward.
What are contingent liabilities and why do they matter?
Contingent liabilities are debts that may arise depending on future events: pending legal claims, warranty obligations, guarantees given to third parties, dilapidation provisions on leased property. They matter because the balance-sheet test includes them. A company that looks solvent on its standard accounts may be insolvent once contingent liabilities are properly valued.
What is the timing point for wrongful trading liability?
Section 214 liability runs from the moment you knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. The court applies an objective standard, but evidence of an internal solvency review or contemporaneous IP advice is the cleanest defence. Acting on advice is the protective step.
Will my accountant tell me my company is insolvent?
Most accountants will flag concerns about going-concern viability through the audit or accounts-preparation process. They are not insolvency practitioners and cannot run the formal s.123 tests as a regulated function, but a competent accountant who reviews the management accounts will usually see the warning signs and recommend you seek IP advice.
