How Do I Know If My Company is Insolvent?

As insolvency practitioners, at Marshman Price we are often asked how to tell if a business is insolvent.  There are two commonly accepted definitions of insolvency:

• that a business cannot pay its debts when they are due; or
• that its liabilities exceed its assets. 

Only one of these criteria has to be satisfied although the two often happen together.

In practice, the odd bill slipping behind because of delays in receiving payment from customers is not a serious issue, however if it becomes the norm that creditor payments have to be “pushed out” and juggled, the bank starts bouncing cheques or arrears of PAYE or VAT mount up, this indicates a more serious problem. 

The recent court judgment of BNY Corporate Trustee Services Ltd v Eurosailhas clarified that the fact a company’s liabilities might exceed its assets is not necessarily evidence of insolvency: the court held that the company must be past the “point of no return” in respect of recovering its position for the second “balance sheet test” to be relevant.  It should however be noted that once a company’s solvency becomes doubtful, the basis of valuing its assets has to be revised and the break-up values of assets must be used instead of open-market values.  Obviously this could have a significant effect on the position.

Insolvency has serious implications for directors, who can be made personally liable for their company’s debts if they allow it to trade while insolvent and run up further debts – they may even be guilty of a criminal offence!  Individuals who go bankrupt can find their bankruptcy extended or restrictions imposed upon them if they continue to incur debts while insolvent.

Failure to pay debts on time may of course be a symptom of poor systems within the business however if it becomes a regular pattern, it is usually an indication of a more deep-seated problem, such as a lack of financial control or working capital, or simple unprofitability.  In any case the business should seek advice from its own accountants, bank or an insolvency practitioner.

Advice I give here is free, without liability on my part. It is not a substitute for formal advice.

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