In the last of our 4 part series on warning signs struggling business need to look, we show businesses 3 methods to determine insolvency.
Legal Test
If a creditor has successfully obtained a County Court Judgment, this may demonstrate the company’s insolvency and the creditor can petition to wind up the company.
If a creditor has obtained a statutory demand for greater than £750 and it remains unpaid for more than 21 days, then the creditor may choose to petition to wind up the company.
Balance Sheet Test
Do you owe more than you own as a company or are the company’s assets exceeded by its liabilities? If yes, then the company could be insolvent.
It is important to point out that this test should include contingent or prospective liabilities.
Cashflow Test
can the company pay its debts when they fall due for payment?
For example if you are not paying the deductions from employees for NIC and Income Tax across to the Inland Revenue on the 19th of the month following the month they were deducted, then the company could be insolvent.
If your trade creditors sell to you on say 30 days terms and you regularly pay on 90+ days, then the company could be insolvent.
So if the company is insolvent you must act to MAXIMISE CREDITORS INTERESTS. Failure to do so could lead to personal liability.
