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:
- The cash flow test – the business is unable to pay its debts as they fall due.
- 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:
- A court order or judgement hasn’t been paid.
- 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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