Am I Solvent? Solvency Tests Explained for UK Businesses

Two statutory tests decide whether a UK limited company is solvent. Fail either one and you’re insolvent in the eyes of the law. That shifts what you’re allowed to do next. It also changes what you could be held personally liable for if you don’t change course.

The cash-flow test asks whether you can pay your debts as they fall due. The balance-sheet test asks whether your liabilities exceed your assets once contingent and prospective debts are counted in. Both come from Section 123 of the Insolvency Act 1986.

What follows sets out how to run each test properly, where directors most often get them wrong, and what to do the same day if either one fails. It does not cover sole trader or partnership insolvency, where the tests work differently. For the broader context around closing, rescuing, or restructuring a UK limited company, see our liquidation hub.

Two things worth knowing before you start:

• You only need to fail one test to be insolvent. Plenty of companies are cash-flow insolvent but balance-sheet solvent, or the reverse. Both matter.
• Courts apply these tests retrospectively. If something goes wrong later, a liquidator will look back at what you knew and when. The test you run today is the evidence trail that protects you.

Quick answer if you’re in a hurry

Here’s what we tell directors calling us today:

• If the cash-flow test fails: stop incurring new credit, stop preferential payments, document the position, and speak to a licensed IP this week.
• If the balance-sheet test fails: the same stops apply. You also need to assess whether there’s a credible recovery path, because the test asks about the point of no return, not a single snapshot.
• If both fail, or you’re not sure: call 0800 074 6757. We will walk you through the position and tell you whether the voluntary window is still open.

The Cash-Flow Test: Can You Pay Your Debts as They Fall Due?

The cash-flow test sits in Section 123(1)(e) of the Insolvency Act 1986. The statutory wording is simple: a company is insolvent if it “is unable to pay its debts as they fall due.”

“As they fall due” is the part most directors get wrong, and we spend a lot of first calls pulling directors out of the common misreading. The test isn’t about your bank balance today. It’s about whether you can meet each obligation on the date it becomes payable, over a realistic horizon.

Here’s what that means in practice. Look at the next 13 weeks. List every committed outflow: PAYE, VAT, supplier invoices on their agreed terms, rent, payroll, loan repayments, and any tax deadlines.

Then list your expected inflows: realistic sales cash, collected receivables with proper aging applied (not the debtor who owes you £40,000 from 2023), and any committed facility drawdowns.

If at any point in that 13-week window the cumulative position goes negative, you’re cash-flow insolvent from that point onwards. It doesn’t matter that the bank account is positive today.

Where this goes wrong in practice: directors treat their oldest receivables as cash. They build forecasts assuming HMRC will accept a Time to Pay plan they haven’t actually agreed. They count overdraft headroom that the bank is quietly reviewing.

Each of these is the kind of mistake a liquidator will flag later. We see it most often when cash forecasts are built in a hurry and never stress-tested against a single missed HMRC deadline.

The Balance-Sheet Test: Do Your Liabilities Exceed Your Assets?

The balance-sheet test sits in Section 123(2) of the Insolvency Act 1986. The wording is “the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.”

The “contingent and prospective” part is what most directors ignore. We see this constantly: a director shows us management accounts that look fine, and we ask about the dilapidations on the lease. Or the BBL that hasn’t started repaying. Or the lawsuit that’s working its way through.

Each of those is a contingent or prospective liability that has to be counted on the balance-sheet test, even if it isn’t on the management accounts.

In BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc [2013] UKSC 28, the Supreme Court refined how this test is applied. The question is not just a snapshot comparison of assets and liabilities at a moment in time. It is whether the company has reached the point where it cannot reasonably be expected to meet its liabilities as they fall due.

That sets a higher bar than mechanical balance-sheet arithmetic. A negative net asset position is not, on its own, conclusive proof of insolvency under this test. But it is a strong indicator, and it requires you to evidence why you believe the company can still meet its liabilities.

What to actually do: take your last management accounts. Add in every contingent liability you would tell an honest valuer about. Remove any asset that depends on the business continuing to trade (goodwill, work in progress that requires more spend to bill out, debtor balances older than 90 days without firm payment plans).

Compare. If liabilities materially exceed assets and the trading position offers no clear path back, the balance-sheet test has likely failed.

Why These Tests Matter: The Director Duty Shift

The reason both tests matter is that they trigger a shift in directors’ duties, and that shift is where personal liability begins.

Under BTI 2014 LLC v Sequana SA [2022] UKSC 25, the Supreme Court confirmed that when directors know or ought to know that a company is insolvent or that insolvent liquidation or administration is probable, the duty under Section 172 of the Companies Act 2006 shifts toward considering the interests of creditors.

This is not a future risk. It applies the moment either test fails. From that point, decisions that benefit shareholders or directors at the expense of creditors are vulnerable to challenge.

The most common consequences are wrongful trading liability under Section 214 (you continued trading after the point of no return and creditor losses got worse), preferences under Section 239 (you paid one creditor ahead of others), and misfeasance under Section 212 (you breached a duty owed to the company).

All three are personal claims. All three can result in you having to repay money to the liquidator out of your own assets. The tests aren’t theoretical, and getting them wrong has direct financial consequences.

Warning Signs That Mean You Should Run the Solvency Tests Today

You should run both tests, formally, when any of these signals appear:

• HMRC has rejected a Time to Pay request, issued a personal liability notice, or moved to enforcement.
• A statutory demand for £750 or more has been served and not paid within 21 days. This is itself one of the statutory tests for insolvency under Section 123(1)(a).
• A judgment has been entered and execution attempted unsuccessfully. Section 123(1)(b) treats this as proof of insolvency.
• Suppliers are putting you on stop or pro forma terms. Trade-credit data flows fast through B2B credit-reporting agencies.
• Your bank facility is being reviewed, reduced, or non-renewed. Banks rarely tell you everything they know about your file.
• You’re paying staff or HMRC late on a recurring basis. This is a cash-flow test failure showing up in real time.
• A contingent liability has crystallised or moved closer to crystallising. Pending litigation, an HMRC enquiry, a dilapidations notice on a lease.

If any of these are present, the tests aren’t optional. Running them and documenting the result is part of your defence file. This is also the point to take advice before missing payments, while the voluntary options are still open to you.

What to Do If Either Solvency Test Fails

If either test fails, here’s the order of operations we walk directors through:

What Happens If You Ignore Solvency Test Failures

Where the company is insolvent and the directors decide to close it themselves, the next step is deciding between the two voluntary liquidation routes, which depend on whether the company is solvent or insolvent.

The single most common pattern we see is directors who ran the tests, found them failing, and kept going. Six months later the company enters compulsory liquidation, the Official Receiver investigates, and the directors face a wrongful trading claim covering the period between the test failure and the liquidation date.

The contribution order is calculated as the increase in the deficiency to creditors during that period. We have seen orders of £20,000, £200,000, and (in a recent case across our network) £1.4 million. The amount is whatever the court considers fair.

Disqualification proceedings under the Company Directors Disqualification Act 1986 typically run alongside. A 5-to-15 year ban from acting as a director is the standard outcome for unfit conduct findings.

None of this is theoretical. It is what happens when the tests are run and ignored. The same tests run, documented, and acted on protect you. Run, documented, and ignored, they become the evidence used against you.

FAQs on UK Business Solvency Tests