Member of BTG Global Advisory

The Corporate Insolvency Test refers to a method of determining a company’s ability to meet its liabilities as they fall due, and whether the total value of its liabilities exceeds assets.

The three individual tests for insolvency should be viewed together to gain a reliable picture of the company’s financial position, and are designed to trigger the appropriate actions should insolvency be the result.

Maximising creditor interests must be the principle focus if results indicate insolvency. You could face investigation as a director if you continue to put your own or shareholder interests first.

Begbies Traynor is available for advice and support in this regard, and operates from over all areas of the UK covered through our extensive office network.

Cash flow test

An inability to pay bills as they fall due is a clear sign of your company’s precarious financial situation. Furthermore, a requirement exists to consider whether you can pay bills ‘in the reasonably near future.’

It cannot be over-emphasised that maximising creditor interests is paramount, and takes precedence over company and shareholder interests in this situation. Directors will be expected to understand that if the company is paying its bills late each month, the effect on creditors needs to be managed.

A commercial insolvency test such as this looks ahead to future payments, and although in some industries payments are inherently later than in others, directors should be able to demonstrate that a clear payment procedure has been followed.

Balance sheet test for insolvency

A ‘fair and accurate’ view of the company’s current and future financial position should be reflected in the balance sheet, and must include all contingent liabilities. Items such as work-in-progress and levels of stock must not be overstated, nor should debts owed to the company that are unlikely, in reality, to be collectable.

Presenting a solvent ‘picture’ of the business does not exclude directors from allegations of wrongful trading if a different view emerges at a later date. It is incumbent on all directors to understand the ramifications of their company’s financial position at all times, and be aware of problems with cash flow and other trading issues.

Personal liability for company debts could result, in addition to director disqualification for a period of up to 15 years. The best way to avoid such a situation is to seek the services of a finance professional who can ensure the accuracy of all figures used within calculations.

Begbies Traynor is the leading corporate recovery firm in the UK, and provides advice and guidance on these matters to companies in distress.

Results of these insolvency tests should be viewed as a whole - passing one test does not guarantee a successful result with another. Even if you think the company has passed both of these checks, a third test exists that could dramatically change the outlook for your business.

Legal action test

The ‘legal action’ test looks at whether a company has outstanding Statutory Demands for Payment, and any unanswered court orders or judgements.

If a County Court Judgement has been upheld against the company, or it has failed to pay a Statutory Demand for Payment of a debt exceeding £750, it is likely that the company will be forcibly wound-up.

The existence of these outstanding payments officially confirms the company’s inability to meet its liabilities, and is used by creditors as a precursor to winding up.

Failing the legal action test is a clear sign that trading should cease immediately, and creditor interests prioritised. You must also seek the guidance of a licensed IP.

What options are available?

Being insolvent is not an untenable situation. Various options remain that could rescue the business if it is deemed viable, or release cash through consolidation of debt.

A licensed Insolvency Practitioner would need to identify your options depending on the company’s current financial position, actions that creditors are likely to take, and whether there are any outstanding statutory payments.

These options might include:

  • Company Voluntary Arrangement: formal negotiations take place with your creditors – if successful, interest and charges on the outstanding debt are frozen, and a consolidated monthly payment is made for an extended period of time.
  • Company Administration: an administrator is appointed to restructure or reorganise the business, with the intention of returning it to profitability.

Begbies Traynor is the UK’s market leader in corporate recovery. We can present all the options available to you, and offer same day consultations free of charge.

Contact our team

Latest News
KCP investment boosts domiciliary care provider Routes Healthcare
KCP investment boosts domiciliary care provider Routes Healthcare
Growing domiciliary care business Routes Healthcare, which provides NHS-funded intensive home care, has received a substantial investment from private equity firm Key Capital Partners (KCP) which has …
The Problems with Using Unlicensed Insolvency Advisers
The Problems with Using Unlicensed Insolvency Advisers
If your business is struggling to stay afloat and meet creditor demands, you may find that unlicensed insolvency advisers will claim to have all the answers to your questions. However, only licensed i…
Begbies Traynor Welcomes R3 Guidance on Dealing with Personal Debt Problems
Begbies Traynor Welcomes R3 Guidance on Dealing with Personal Debt Problems
The insolvency trade body R3 has published a new guidance document on the subject of how best to deal with the prospect of personal insolvency as a UK individual. As experts in both personal and corpo…
Historic construction and restoration company William Anelay placed into administration
Historic construction and restoration company William Anelay placed into administration
On 8 September 2016, Julian Pitts and Bob Maxwell of Begbies Traynor were appointed as joint administrators of William Anelay Ltd; one of Britain’s longest-established construction and heritage restoration companies
Director promotion at Begbies Traynor Preston
Director promotion at Begbies Traynor Preston
Ian McCulloch has been promoted to the position of Insolvency Director at Begbies Traynor's Preston office after eight years with the firm
First Ruling of Section 342A of the Insolvency Act
First Ruling of Section 342A of the Insolvency Act
Mark Raeside QC presided over four separate days in the High Court last week as Section 342A of the Insolvency Act was finally ruled upon, directing what constitutes an excessive contribution to a pension scheme which can be set aside by a trustee in bank

Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland