A company is insolvent if it has insufficient money or assets to discharge its debts and liabilities. Insolvency can arise from poor cash management, a reduction in cash inflow, or an increase in expenses. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent person or entity, and assets may be liquidated to pay off outstanding debts. Business owners may contact creditors directly and restructure debts into more manageable installments. Creditors are typically amenable to this approach because they desire repayment, even if the repayment is on a delayed schedule.

There are two tests to determine whether your company is insolvent:
• The cash-flow test: are your company’s current debts, or future debts, unable to be paid as they fall due?
• The balance sheet test: is the value of your company’s assets less than the amount of its liabilities, taking into account the present uncertain circumstances and future liabilities?

If the answer is YES to either of these two tests, then your company would probably be deemed to be insolvent under English law.

As with Bankruptcy, it’s likely that your case will be unique. But there are some general consequences of Corporate Insolvency that could apply to you and your company:

Customers and suppliers may take protective measures under contracts with your company. For example, they may terminate their contracts with you because Insolvency will very likely entitle the other party to trigger this event. You may wish to check the termination clauses in the contracts your company has with customers and suppliers;
• Transactions can be reviewed and reversed going back two years from Insolvency;
• Increased risk of personal claims against you and the possibility of being disqualified as a director;
• A lender (such as your company’s bank) will be entitled to enforce any security it holds because a formal Insolvency procedure will be considered an event of default;
• A winding-up petition may be issued against your company by a creditor who has served a statutory demand for payment of a debt your company owes. This means your company may be placed into Compulsory Liquidation;
• If a winding-up petition has been presented and your company wishes to continue to sell goods (or make payments for supplies) while a winding-up petition is in progress, it will have to obtain authorisation from the court.

With Insolvency, there are a number of options that may be available to you, and they all need to be carefully considered. It’s likely that you may already have strong connections with a legal professional but it’s well worth having a chat with someone who specialises in this area, to get the best advice for your particular situation.

For more information on our Insolvency services please click here.