Is my Company Insolvent?

When a company cannot pay its bills on time, as and when due, under the Insolvency Act 1986, technically your company is insolvent, or in a state of insolvency. This is known as cash flow insolvency.

Another test for insolvency is where the assets of the company are worth less than the liabilities, which is known as balance sheet insolvency.

It’s not rocket science. Cash is king, and cash flow problems are the most frequent cause of company insolvency.

A small business is a fragile entity, that doesn’t have a large capital base to sustain it through difficult times.

Once a company gets behind with it’s cash flow, it is in a catch 22 situation, where it cannot trade out of the position, because it needs additional cash to fund the trading – at which point, the directors are faced with the choice of injecting more funds, which can often be throwing good money after bad, or looking at formal insolvency options such as Liquidation.