The Insolvency of a Company

The insolvency of a company is a serious issue that can have many consequences for all involved including employees, shareholders, investors, customers and creditors. Insolvency occurs when a company can no longer pay its debts when they fall due. This can occur even if the company has significant assets, but they cannot use those to cover their debts in the short term.

There are two tests to determine whether a company is about to be insolvent – cash flow insolvency and balance sheet insolvency. Cash flow insolvency is where a company can’t meet its short-term debt obligations such as loan payments. This could be caused by excessive investment in goods or services that can’t be sold or by poor oversight that leads to overspending. A balance sheet test looks at a company’s assets and liabilities and where the value of the liabilities exceeds the assets this is considered insolvent.

The Insolvency Process: What to Expect When a Company Is Insolvent

Other warning signs that a company is on the verge of insolvency include letters from suppliers demanding payment, late payments to other creditors and tax arrears with HMRC. Companies that are nearing insolvency may also extend their payments to creditors through part-payment of invoices with rounded sums that can’t be reconciled to specific invoices.

If you suspect that your business is insolvent or is likely to become insolvent, it’s important to act quickly to ensure your rights as a creditor are protected. This could involve entering into a formal insolvency process such as a voluntary arrangement, liquidation or administration.