What actually defines “insolvency”?

What actually defines “insolvency”?

Under pressure business owner asks:

My business is struggling a bit. What is the actual definition of “insolvency”?

Acumenica answers:

If you are a company director and your business is experiencing financial pressure, then it’s important to know what defines insolvency. Once your company becomes insolvent, your responsibilities as a director change considerably. In effect you must act in the best interests of creditors rather than the shareholders. It’s an important distinction that you need be familiar with because getting it wrong can lead to a charge of misfeasance or wrongful trading.

Insolvency is not defined under the Insolvency Act 1986 but it is generally accepted that a company is insolvent if it satisfies one of the following tests:

The Balance Sheet test

A company is insolvent under the Balance Sheet test when it’s liabilities exceeds its assets. IE, a negative balance sheet.

The Cash Flow test

A company is insolvent under the Cash Flow test if it’s unable to pay it’s debts and/or obligations as and when they become due.

If you think your company may heading towards, or is already in, an insolvent position, you should seek professional assistance immediately. The Acumenica team are on hand to help business owners with all such matters. To arrange a no-obligation confidential chat, please complete the form on our Contact Us page or call 03330 166559.