How do you know if your company is insolvent? What are the warning signs?
The business is unable to keep up with financial obligations and is regularly late making payments.
You have had a County Court Judgement (CCJ) issued against the company, that has gone unpaid.
your company cannot pay its debts when they fall due.
If any of the above can relate to your business, you should seek advice immediately. We are a firm of licensed and regulated insolvency practitioners and turnaround specialists.
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Is my company insolvent?
If your company is insolvent, where you cannot pay your liabilities when they fall due and/or you are facing creditor threat, you must act quickly. Your main responsibility is to ensure the position of creditors does not deteriorate and by ceasing trading this also stops you from being accused of wrongful trading. Get in touch with us and we can give you advice to help you turn your business around or deal with the situation at hand. You may have an idea of the warning signs of insolvency but you also need to understand the difference between being in debt and being insolvent. As insolvency is a serious matter, you need to be aware of what it is, how to deal with it and what could happen if you ignore the warning signs.
There are three key tests for insolvency
- Cash flow test
If your company cannot pay its debts when they fall due then it is classed as being insolvent. As director, you have a legal requirement to understand the financial issues of your company. If you believe that your company has insufficient funds to pay its liabilities on time, then you must take advice and action. If your company is insolvent, you should act to minimise loss to your creditors with swift action. Failure to do this could lead to loss of your limited liability protection which would see you become personally liable for company debts.
- Balance sheet test
Does your company have more liabilities than assets? If it does, then your company is technically insolvent. However, your company could be balance sheet solvent but cash flow insolvent. It is also important to point out that the test should include contingent and prospective liabilities. These may be where a court is yet to make a decision on how much a company owe due to a court action etc.
- Legal action test
If you have received a county court judgement (CCJ) from a creditor, this could demonstrate a company’s insolvent situation. If you ignore this, a creditor may petition to wind up your company. If you have obtained a statutory demand from a creditor and it remains unpaid for 21 days, the creditor may petition to wind up your company.
If any of the above apply to your company, or you have received a winding up petition, it is extremely important that you address this and your company’s insolvent position. You should get in contact with us and we can help you deal with your current financial situation. As director, you may be accused of wrongful trading, if you carry on trading in the knowledge of your insolvent position, or at a time when it could be reasonably judged that you ought to have recognised the company’s insolvent position, particularly if there is no prospect of the following happening:
- New or additional capital being introduced to the business to place the balance sheet back into a solvent position or to remove cash flow pressures.
- The sale or acquisition of the company.
- A company voluntary arrangement (CVA) or administration.
- Trading out of the position.
If any of the above applies to your company and its current financial situation, we can advise you on the best practice for your company in its current financial situation.
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