If you are a limited company director whose business is struggling, you may be wondering if you have reached the point of insolvency.

This article will explain the state of insolvency, tell how you to judge if you have reached it, and explore your options if that’s the case

Insolvent Business: Definition

Insolvency means your debts either outweigh your assets, or you cannot pay your bills when they fall due.

It is a serious situation for any limited company and requires urgent, professional attention if you are to survive it.

Running an Insolvent Business

If you’re the director of a business you suspect may be insolvent, our advice is to take professional advice immediately. Becoming insolvent fundmentally changes your responsibilities. In solvency, you are working for the benefit of shareholders, but when insolvent you must prioritise creditors instead. Failing to demonstrate that you have done so, might land you in hot water if the company goes into liquidation and it’s found you placed others interest first.

Read our full article here about directors responsibilities in insolvency.

What Makes a Business Insolvent?

There are two tests for insolvency. We suggest you gain clarity on this point immediately before continuing.

Balance Sheet Test – This is where a simple spreadsheet detailing your financial situation can point to insolvency. Do you owe more money than you have coming in? If so, your business is insolvent.

Cashflow Test – This test establishes how much cash flow your company has at any given time. If you can’t find the cash to pay bills on time, you may have crossed the threshold into insolvency.

We’ve combined both of these into one easy to use interactive insolvency test. It takes just 2 minutes to see the results.

How to Declare a Business Insolvent?

(1) Contact an insolvency practitioner (IP) such as ourselves to discuss your options

(2) The IP will handle the process of declaring the company insolvent, which will involve a shareholders vote, plus advertising the situation in the Gazette, which is the official journal of public record.

(3) If the IP is recommending liquidation, your role as director will cease. The liquidator will sell any company assets and distribute the proceeds to creditors in order of priority. Then the company will be struck off the register at Companies House and it will cease to exist.

Is there an Insolvency Register for Businesses?

Where there is an insolvency register for individuals that have declared bankruptcy, there’s no corresponding system for businesses.

Instead, you can search a list of companies in liquidation here.