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Is my company insolvent?

Reviewed 12th February 2024

What are the warning signs that my company is insolvent?

As a company director, you have to keep a close eye on your business’s finances, particularly when it’s struggling. As soon as your company becomes insolvent, your duties as a director will change. Rather than running the business in the interests of its shareholders, you are obliged to prioritise the interests of your creditors (parties you owe money to), which usually means ceasing trading. 

If you continue trading when you know or should have known the company was insolvent, you could be disqualified from acting as a director or be made personally liable for company debts. That’s why it’s so important to recognise when your company is insolvent and the warning signs to look out for. 

What is an insolvent company?

An insolvent company is one that cannot pay its debts when they’re due and/or its liabilities outweigh its assets. 

Usually, a limited company slips into insolvency gradually, which is why it often goes unnoticed. However, if you’re experiencing cash flow problems and are receiving constant pressure from trade creditors or HMRC, or threats of legal action, there’s a good chance your company is insolvent. 

How do I know if my company is insolvent?

There are three tests you can do: the cash flow test, the balance sheet test and the legal action test. If your company fails any of these tests, the likelihood is it’s insolvent. 

The cash flow test
Can your company afford to pay its bills as they are due or in the near future? If you cannot pay your suppliers, tax bills or staff on time, and there’s no prospect of you being able to do so anytime soon, your company is insolvent.

The balance sheet test
Does your company owe more to creditors than the value of its assets, including cash in the bank? If the value of the company’s liabilities exceeds its assets then your company is insolvent. 

The legal action test
Are there outstanding legal demands against the company for payment? If a creditor has issued you with a Statutory Demand or County Court Judgment (CCJ) you have not paid then your company is technically insolvent. 

What are the warning signs of company insolvency?

On a day-to-day basis, there are lots of signs that indicate your company is heading towards insolvency, including:

Companies often go through good and bad periods, which can make an insolvent business difficult to identify. However, if you recognise some of the above signs in your company and it fails any of the insolvency tests, you should seek professional help immediately.   

What should I do if my company is insolvent?

If your business is struggling, the temptation for many directors is to continue trading to try and dig themselves out of a hole. However, if you create new debts and the business subsequently fails, you will face accusations of wrongful trading and potentially become personally liable for those losses. You may also be subject to director disqualification proceedings. 

If you are worried that your business is insolvent, it does not necessarily mean it’s the end. Contacting a licensed insolvency practitioner as soon as possible will help to protect you from allegations of wrongful trading. They’ll also be able to advise you on the various options available to you.

Those options include:

Get advice as soon as possible

At Scotland Debt Solutions, we can determine whether your company is insolvent, advise you on how to avoid allegations of wrongful trading help you find the best way forward. Please call our team for a free, same-day consultation.

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