What is Insolvency?
Insolvency, according to its definition within the Insolvency Act 1986, is simply when a company cannot afford to repay the debts it has accrued.
How does the Insolvency Act affect companies?
The Insolvency Act is deliberately broad so that it can be applied to a plethora of companies in a variety of different situations. Whilst it does not set out a particularly strict test to define whether a company is insolvent, it sets out the following two guidelines.
Within Section 123 (1), the cashflow test is outlined. Essentially, if a business cannot pay its debts as they become due or a creditor is owed more than £750.00 which is not paid within 3 weeks of the debt arising, the business is seen as being at risk of becoming insolvent.
Within Section 123(2), the balance sheet test is defined as when a businesses assets have less value than its liabilities. A balance sheet test takes into account prospective and contingent liabilities such as debts which have not yet arisen.
My company is at risk of becoming insolvent. What can I do?
There are a number of methods suited to dealing with insolvency. These include (but are not limited to) the following: administration, company voluntary agreements, liquidation, moratorium and restructuring.
One of our clients was in this exact situation a few months ago. As their balance sheet test showed they were within the remit of insolvency, we decided that there needed to be voluntary company agreements established. With our help, the company was able to pay its supplier the debt it had accrued over the course of a year rather than as a lump sum. This means that rather than becoming insolvent, the company is still trading as we speak and is on course to pay its debt and grow as a company.
