Am I Insolvent?
“Am I, as a sole trader, insolvent?”
You may think that being under cashflow pressure is not the same as being insolvent. This is not true! Inability to pay debts on time is a definition of insolvency – see below.
It is vitally important to understand that, if the business is insolvent, this results in a shift in the sole traders duty of care from acting for the business to ensuring the creditors position is maximised.
Use this page to establish if the business (and therefore yourself) is insolvent.
So how do you know if the business is insolvent? How can you tell if you are insolvent even if the business appears sound? By now you will have studied the warning signs pages and learned that apparently insignificant issues can lead to business failure when combined. This page will tell you whether the business is insolvent or not.
There are three methods to determine insolvency.
1. Cashflow Test
1.1. Simply – can the business pay its debts when they fall due for payment? For example if you employ people and are not paying the deductions from employees for NIC and Income Tax across to HMRC, then the business could be insolvent.
1.2. If your trade creditors sell to you on say 30 days terms and you regularly pay on 90+ days, then the business could be insolvent.
1.3. If you believe that the business has insufficient cash to pay its liabilities on time then you must take advice/action.
2. The Balance Sheet Test
2.1. Simply – do you owe more than you own as a business or are the businesss assets exceeded by its liabilities?
2.2. Do you owe more than you own personally? If yes, to either, then insolvency is a probability.
2.3. It is important to point out that this test should include contingent or future liabilities. (If you need advice on these issues call or email us).
2.4. Many people tell us that on a balance sheet test the business is not insolvent therefore they do not need to act. However, under the cashflow test above the business may, of course, still be insolvent.
2.5. In our experience an apparently solvent balance sheet may include items that are overstated, such as stock and work in progress, or debtors that are not really collectable. After deducting these items many balance sheets become insolvent.
2.6. So be prudent – you should present accounts to show a true and fair picture of the business.
3. Legal Action Test
3.1. If a creditor has obtained a County Court Judgment (CCJ) against either the business name or in your name, this may demonstrate the businesss or the individuals insolvency and the creditor may seek to recover this debt via the bailiffs or the Court may demand that you attend to examine your financial means, or the creditor may petition for bankruptcy proceedings.
3.2. If a creditor has obtained a statutory demand for greater than £5000 (from 1st October 2015) and it remains unpaid for more than 21 days, then the creditor may petition to make you bankrupt.
