What Does it Mean When a Company is Insolvent?

What Does it Mean When a Company is Insolvent?

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When a company insolvent it means that it can no longer pay its debts as and when they fall due. There are two main tests that can be used to assess whether a company is insolvent; one is called the cash flow test and looks at the ability of a business to meet its outgoings as they fall due, whilst the other is the balance sheet test which considers the value of a company’s assets against its current and prospective liabilities.

A range of issues can lead to company insolvency, not just cash flow problems. For example, a delay in payments from customers can impact on a company’s short-term cash flow and if the issue continues the company may have to cease operations.

Rising vendor costs can also contribute to company insolvency as it often means that companies pass these cost increases on to consumers. This can lead to a reduction in customer numbers which further impacts on a company’s income.

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Regulatory failure such as not filing taxes or paying HMRC late can also contribute to a company becoming insolvent as this can incur penalties which further erode a company’s income.

Once a company is insolvent it is important to seek expert advice from licensed insolvency practitioners as this can help to minimise the potential losses to outstanding creditors. There are a number of options which can be considered including a Company Voluntary Arrangement (CVA) which involves paying a reduced amount of debt over an agreed term with any outstanding debt being written off at the end of the process. If a company is deemed to be beyond rescue it can then be put into liquidation where the assets of the company are identified, valued and sold with any proceeds being distributed to creditors.

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