The Common Warning Signs of Insolvency Are:
- Overtrading (lack of capital to pursue growth strategy, declining profit margins)
- Accrued debts with HM Revenue & Customs
- Significant bad debts & aging debtor ledger
- Terminal bank overdraft position – continually at the limit
- High staff turnover
- Delays in producing and providing financial information when requested
- CCJ’s, Statutory Demands or WRITS registered against the Company
- Loss of major contacts resulting in cash flow crisis
- Constantly receiving red-top letters from creditors
- Bailiffs attending to pursue unpaid debts
If your Company is encountering financial pressure and you are unsure whether the Company can meet its commitments as and when they fall due, your Company may be technically insolvent. Three test of solvency are:
1. BALANCE SHEET TEST
Is the business insolvent on a balance sheet basis, i.e. do the total sum of the Company’s creditors exceed its total assets?
2. CASHFLOW TEST
Can the business meet its commitments as and when they fall due?
3. LEGAL ENFORCEMENT TEST
Has any of the Company’s creditors obtained judgment? Are there any outstanding Statutory Demands that have not been set aside?
Confirmation of the exact point at which a business is insolvent is not determined by one single factor but by a range of circumstances specific to each business. It is therefore important that clear, independent advice is sought as soon as possible to enable as many recovery and restructuring options are available. As outlined in the criteria above, a Company can be comfortably solvent on a balance sheet basis yet suffer from a poor cash flow position, rendering the business illiquid and unable to settle its liabilities as and when they fall due.
In all circumstances, Parker Andrews can help – contact one of our Insolvency Practitioners for a confidential discussion about your scenario.