Corporate Services
If you are the director of a limited company, you carry legal obligations to deal with creditors in a responsible manner, maximising their interests. Should a director believe that a business is insolvent, his/her first responsibility is to care for creditors’ interests, not those of shareholders. The information below sets out three tests to help you ascertain whether or not your company may be insolvent
The Balance Sheet Test
If the value of a company’s liabilities exceed that of it’s assets, the company is probably insolvent. It is important to note that, in many cases, assets may well be overstated. The value shown for stock may include obsolete or redundant items that will never be sold. The value of debtors may include amounts that will never be collected due to disputes or even the insolvency of the customer. Work in progress may have no real value unless a job or contract is concluded. A director needs to be prudent in assessing whether a business is solvent under this test.
The Cash Flow Test
Simply stated, this means whether a business can settle it’s liabilities as and when they fall due. If a company cannot pay it’s PAYE liability every month, or it’s VAT every quarter, then it probably fails this test. If management accounts show the value of outstanding creditors increasing (without corresponding increase in turnover), or creditor days increasing beyond 60 days, then again, in all likelihood, the company is insolvent.
The Legal Action Test
If a creditor has obtained judgement in the County Court, then the legal action test has failed and the company is probably insolvent. It should be noted that if a creditor obtains a judgement for a sum in excess of £750, he may issue a statutory demand which may lead to the compulsory winding up of the business. Even if winding up proceedings are not commenced, recovery proceedings may well include the visit of a bailiff in order to recover assets to the value of the judgement debt together with costs.
Should you believe that you business fails any, or all, the above tests, it is vital that you, and any other co-directors seek urgent advice on how to deal with this insolvent position. T H Associates can offer advice that can lead to your company’s recovery or, in the worst case scenario, can help you ensure your own legal position.
The following pages set out some of the option that may be open to you.
Should you have further questions, please do not hesitate to ring us on 01772 641146 or submit an enquiry form.
