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What Does Insolvency Mean?

Insolvency is one of those words that’s thrown around but you may not know what it really means.

In UK company law, there are two tests to decide if a company is insolvent:

  1. The cash flow test – the business is unable to pay its debts as they fall due.
  2. The balance sheet test – the value of the liabilities is greater than the value of the assets.

See http://www.lawplainandsimple.com/legal-guides/article/what-does-insolvency-mean

These tests are very demanding on the face of it. What business pays all its debts on the due date?

In practice, a company is deemed unable to pay its debts if:

  1. A court order or judgement hasn’t been paid.
  2. One of your creditors, who is owed more than £750, has served a formal demand for an undisputed debt at the registered office and the debt isn’t paid within three weeks.

You can find more details here http://www.companyrescue.co.uk/company-rescue/guides/insolvency-test

Warning – I’m not a lawyer. Please take appropriate professional advice if you believe your business may be insolvent. There are important consequences for the directors.

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