When is a Company Insolvent? Three Ways to Check

14th June 2019

When is a company insolvent?

When is a Company Insolvent? Three Ways to Check

14th June 2019

There can be times when the future of a company becomes uncertain – but when is a company insolvent?

As a director you bear the responsibility for recognising when your company is struggling and figuring out the best route to take. If you don’t, and continue trading, you risk being held personally liable.

But when is a company insolvent, and how can you tell whether you’ve reached that point?

Here are some simple steps you can take to figure out whether you’ve fallen into insolvency.

The cash flow test

Firstly, is your company able to pay its debts as they fall due?

Being unable to pay invoices by the due date is a sign your company could be having cash flow problems, indicating in turn that the company could be insolvent. This is known as the cash flow test.

If your company is on a VAT surcharge regime or paying late payment interest, this could also be a strong indicator that the company is unable to repay its debts as they fall due.

Another problem companies often face is being unable to pay their taxes in time. HMRC will  alert you if you’re late in paying your tax, with a stern-looking letter demanding that you settle up immediately.

If you’ve received letters like this and your company lacks the financial means to pay the tax due, it’s likely the company is insolvent.

The balance sheet test

The balance sheet test is another way to check whether your company is in financial difficulty.

This test looks at your company’s assets versus its liabilities. Assets are anything your company owns, including property, stock, vehicles, equipment and cash. Liabilities are debts the company owes, such as overdue tax and money owed to creditors.  

So, when is a company insolvent according to the balance sheet test? If the value of the company’s assets is less than the total of its debts, then the company is insolvent.

If you’re uncertain whether the company’s assets are enough to cover its debts, then your company may be insolvent.

When is a company insolvent? Legal action could be a sign

If your company has received any legal enforcement actions against it, this could be another strong indicator of insolvency.

If you’ve been presented with a winding up petition, a statutory demand or a County Court Judgment (CCJ), it’s important that you immediately seek professional advice. Legal actions taken by creditors (the people or businesses your company owes money to) are a clear indicator that the company could be insolvent.

What are your duties as a director?

Whilst the above tests should help you work out whether your company is insolvent, we should stress they aren’t always conclusive.

If you’re in any doubt, it’s a good idea to seek professional advice. This will help ensure you’re meeting your obligations as a director and acting in the best interests of your company –  as well as avoiding any personal liability.

When a company is solvent and financially stable, the directors have a duty to maximise returns to the shareholders and ensure the company continues to make a profit.

However, once a company becomes insolvent – whether you’re aware of  the insolvency or not – your duty as a director shifts towards the company’s creditors. In other words, your priority should be to pay creditors rather than maximising shareholder returns.

When is a company insolvent? What to do if you’re concerned

So, when is a company insolvent? If you’ve used the tests above and are concerned about your company, it’s important you seek advice.

We can assist you in the following ways:

  • We’ll listen to your concerns and provide professional advice on the most appropriate options, as we fully understand the pressure that business owners and directors face.
  • We’ll thoroughly explain the options you have for your company’s future.
  • We can offer a strictly confidential meeting, with no strings attached and no fees required, creating a safe space for you to discuss your concerns about your company and its financial position.
  • If your company is insolvent, we specialise in debt recovery and business rescue as well as insolvency proceedings.

If you’re in any doubt, give us a call and we’ll be able to clarify your position and your options, and answer any other questions you have.


Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions. Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.

More about us

Hudson Weir Ltd (Company number 09477593) is a company registered in England and Wales.

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