A company is deemed to be insolvent if it is unable to pay its debts as they fall due or if its assets are less than its liabilities. If the problem is acted upon quickly, it may be possible to save the business from collapse. If not, the firm may be forced to close either voluntarily or involuntarily.
Understanding the financial position of your company is essential, as trading whilst insolvent is an extremely serious offence that can carry grave consequences. Should you ever be unsure, you should seek specialist guidance from a licensed insolvency practitioner at your earliest opportunity, as they can carry out an in-depth review of your firm’s liquidity and discuss your options with you.
There are a few ways in which company directors can determine whether or not their firm is solvent. The first is known as the ‘cash flow insolvency test’, which asks whether the business is able to pay its bills whenever they fall due. Potential liabilities involved include PAYE, VAT, National Insurance Contributions, supplier payments, rent and utility charges, and bank loans. If a company consistently finds they do not have enough funds available to satisfy these obligations as they fall due, it may well be insolvent.
Another common way of determining solvency is the ‘balance sheet test’. This involves finding out whether the firm’s assets, including available cash in the bank, are worth more than the debts they owe. If not, the business could be considered to be insolvent. The final method is if a company is facing legal action from their creditors, such as County Court Judgements (CCJs) or Statutory Demands, that it cannot pay.
Should any of the above apply to you, it is important to seek specialist assistance as soon as possible. Contacting a licensed insolvency practitioner and business recovery expert quickly will give you the best possible chance of turning around your fortunes and saving your business, as there will be more options available to you. These options will diminish in number the longer you wait, making liquidation even more inevitable.
Once insolvency has been established, it is important that your company ceases trading immediately and all contracts (both present and future) are terminated. If saving the company is possible, there are a few ways in which this can be achieved. These include administration, a pre-pack sale, a moratorium, administrative receivership, company voluntary arrangements, and schemes of arrangement.
Should recovery not be a viable option, the company will unfortunately need to be closed down via liquidation. An insolvent liquidation is either done voluntarily (provided shareholders and creditors agree to it), or will be forced upon business owners by their creditors in the form of a compulsory winding up order. It is always a good idea to pursue a voluntary liquidation if at all possible, as this will give you a lot more control of the process — such as deciding which liquidator you would like to use.
It is also possible to liquidate a solvent company. There are a number of reasons why a business owner would want to do this, such as if they want to retire, or the firm is no longer required. Closing a solvent company by way of a Members Voluntary Liquidation (MVL) is an extremely popular choice, as it is considered to be the most tax-efficient method for a shareholder to exit a firm.
Even if a struggling company is not yet insolvent, it can still seek expert guidance from a business recovery specialist. They will take a detailed look at all the circumstances involved in the case and outline how they can help.