Insolvency is something that affects thousands of businesses each year. Unfortunately, many are forced to close as a result of being insolvent.
Sometimes, a director may not be aware that their company is insolvent, which could make them guilty of wrongful trading.
In any case, a director who knows that a company is insolvent and decides to continue to trade, therefore increasing the debts of the business, can be made liable for company debts.
Your limited company will be deemed insolvent if you can no longer pay bills when they fall due or the total of your liabilities exceeds the total value of assets.
There are three tests you can carry out to determine if either or both of the above are true:
• The cash flow test – can your company pay its debts when they are due?
• The balance sheet test – does your company owe more than it owns, or are the assets exceeded by its liabilities?
• The legal action test – if a business you owe money obtains a court judgment that goes unanswered or if your company has outstanding Statutory Demands for payment.
If your company fails any of these tests, you must maximise creditors’ interests as a priority, and your company is likely insolvent.
Here are some other red flags that your company could be heading for trouble:
‘Ceiling borrowing’ is when a business takes the maximum amount of money possible from its debtors or the bank to keep itself afloat.
You will likely also find that suppliers are refusing you credit or that you do not own sufficient assets to get a secured short-term loan.
If your company cheques have bounced, suppliers may decide to take legal action in the form of a statutory demand.
Pressure from your creditors
One sign your company is heading for trouble is if your credit card companies, lenders, and other creditors have been pressuring you more than usual.
If this is happening and you’ve failed to reply to messages requesting immediate payment, you’ll need to act fast to avoid further fines and any threats of repossession.
Directors are not being paid
It’s not a very good sign if there are insufficient funds in place to pay the people in charge – especially if your business has been up and running for more than a year.
There is no money to pay staff wages
If the likelihood of meeting your wage bill is slim, this is a sure sign that insolvency is looming.
You may not have taken a salary from the company yourself recently, hoping that the situation corrects itself.
But this is very rarely the case, and once employees’ wages go unpaid, your business is already technically insolvent.
HMRC contacts you
With plenty of resources at their disposal when it comes to chasing organisations that owe them money, HM Revenue & Customs (HMRC) can put you under pressure before you know it.
They will not hesitate in taking action against you once they suspect that your organisation is insolvent.
You may need to close your limited company if it is insolvent.