Companies in crisis: How can I tell if my company is insolvent?

The financial landscape is changing and evolving in a way we have never seen before. This uncertainty means it’s hard to think about the long term. In times of crisis it may feel that firefighting is all you can do.

Whilst you may think your company could be heading for insolvency, it might not be the case. In part three of our companies in crisis Q&A series aimed at company directors, senior litigation lawyer Alexander Neale explains the different scenarios that would mean a company is insolvent.

Key points

A company is normally considered insolvent if it cannot pay its debts when they are due.

Statute provides for two simple tests to show that a company is insolvent:

• Cash flow test – where a company cannot pay debts as and when they fall due
• Balance sheet test – where the value of a company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

If you think your company may become insolvent, our insolvency experts can talk you through your options.

To watch previous videos from our companies in crisis series, please click on the titles below.

• Part one: I am concerned for the future of my company because of Covid-19. What steps should I take?
• Part two: I have signed personal guarantees to my company’s lenders but what happens if the company then becomes insolvent?
• Part three: How can I tell if my company is insolvent? 
• Part four: My company is receiving pressure from creditors but it can’t afford to pay what it owes. I think that my company is now insolvent, what options do I have?
• Part five: Should my company continue to trade if I know that it has no way of paying all its debts?
• Part six: If my company is placed into an insolvency process, how will this affect me?
• Part seven: What duties do I owe as a company director and do my duties change if the company becomes insolvent?
• Part eight: My company is due monies from several customers. What steps can I take?