What is an Insolvent Business?

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

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.

What’s the Test for Insolvency?

There are two tests for insolvency.

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.

What is an Insolvency Practitioner?

When a business is insolvent, there are a number of strategies available to either rescue or close down the limited company. Most of these require the services of an insolvency practitioner: individuals with the training, qualifications and experience to work with businesses in distress.

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.

What are my Next Steps if the Business is Insolvent?

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

(2) As a director, you need to be careful to document all actions taken once you realise your situation. Your primary responsibility is to creditors and any behaviour that does demonstrate that could leave you open to accusations of wrongful trading.

(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.

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