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How do I know if my company is solvent or insolvent?

Whether you decide you want to close your company solvently or you are worried about your company’s financial position, you will need to be confident that your company is completely solvent.

A solvent company is a company that can pay all its liabilities as and when they fall due as well as not having any threats or action from creditors. Whereas a company that is insolvent may have cash flow difficulties, more liabilities than assets or is facing creditor pressure.

There are three different tests a director can run to check if their company is solvent or not, they are:

Cash flow test

Some indications of insolvency that you can look out for in this test, are:

  • The company is not up to date with PAYE, National Insurance and VAT payments.
  • The company is struggling to adhere to creditor’s payment terms and any outstanding money owed cannot be paid from cash in the bank or money that is due into the company.

If there are warning signs, such as the above, and there are cash flow issues then it is likely that your company could be in an insolvent position.

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Balance sheet test

If your company’s liabilities exceed the value of its assets then it is likely that your company is insolvent. The amount you owe to creditors should not be more than the value of your company’s assets and the money it currently has in the bank.

Legal action test

Another warning sign for your company would be if a creditor has threatened or issued legal proceedings against you, such as a county court judgement (CCJ) or a statutory demand, for monies owing that the company cannot pay.

Even if the amount claimed to be owing is disputed by yourself, the company cannot be seen as solvent until the claim is either settled or dismissed in court. However, if you do not act quickly with these sorts of proceedings it can lead to a bad credit rating and/or further action.

What if your company fails any of the tests?

If your company fails any of the above tests, it is likely that the company is insolvent. The company directors have a legal obligation to seek the correct advice or take appropriate action as soon as possible if the company is insolvent. As a result, a solvent closure such as a MVL or dissolution would not be appropriate in these circumstances.

However there are options still available as insolvency proceedings would be appropriate in this situation including (but are not limited to): creditor’s voluntary liquidation (CVL), company voluntary arrangement (CVA) or administration.

If you wish to close your company via MVL or you are worried that your company may be insolvent, get in contact with us on 0800 901 2475 to discuss this. Call us now and our friendly, knowledgeable advisers will be able to point you in the right direction.

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