What Are the Warning Signs of an Insolvent Company?
Knowing when a company has entered into insolvency is important as it fundamentally alters your duties as a director. Instead of promoting the interests of company shareholders, you must protect the position of its creditors.
If you continue to trade while technically insolvent, you may have to face legal and financial repercussions later down the line – even if you weren’t fully aware of the situation.
So what are the warning signs of company insolvency? How can you check if your business is insolvent? And what are the next steps to consider?
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The Warning Signs of Company Insolvency
If your business is beginning to struggle, there’s a good chance it has entered or is approaching technical insolvency.
A company becomes technically insolvent either when it can’t pay its debts as they fall due, or when its liabilities outweigh its assets.
Being aware of the warning signs can help you to seek early intervention, which can protect you from having to face personal legal and financial liabilities. It may even secure a financial turnaround for the business.
When your business is operating with its overdraft maxed (or nearly maxed) out, chances are it’s struggling with some cash flow issues.
If the company isn’t insolvent already, it’s likely just around the corner: the business has very little spare cash to play with, and if it has been in a state of continual decline, it won’t be long before it becomes insolvent.
Your income for the year may be up, but this means nothing if you have low profit margins. Low-profit margins can indicate that your costs are too high. A continual decline in your profit margin isn’t sustainable and might result in insolvency further down the line.
Repeatedly failing to meet agreed-upon repayment dates can cause suppliers to withhold deliveries until they receive what they’re due. This is a sure sign the business is no longer viable. It’s also liable to make issues worse, as supplier issues can have a knock-on effect on future profits.
If you’re worried about paying staff wages, insolvency is probably looming. A classic warning sign is directors not taking out their own salary in order to support the company’s balance sheet.
Failure to pay staff wages on time is a failure of the company to pay its debts when they’re due, making it technically insolvent.
Being unable to pay bills when they’re due makes a company technically insolvent. Companies may miss the odd bill payment – either through oversight or temporary cash flow issues – but when this happens frequently it indicates the business is no longer viable.
If the issue isn’t resolved, creditors may begin issuing Statutory Demands and pursuing the liquidation of your business. Forced liquidation will open investigations into your conduct, which can spell disaster if you’ve been trading whilst insolvent.
If you’re receiving constant communications from creditors demanding repayment – either in the form of Statutory Demand letters, past-due letters, or angry phone calls – your business is likely insolvent.
Delaying repayment to creditors or being unable to repay is a solid indication that the business is no longer viable and needs the assistance of a formal insolvency procedure.
It might seem obvious but one of the biggest warning signs is your own state of mind. If you’re feeling hounded, stressed and worried, it’s likely that something is amiss.
How Do I Check if My Company Is Insolvent?
It’s always worth double-checking if you think your business is insolvent. Identifying the problem can allow you to take the next appropriate action, whether that be liquidation or a business recovery option.
There are two main ways to check whether a company is insolvent. If you’re feeling unsure, our team can assist you.
Cash Flow Test
This test looks at the income of a business and assesses whether or not it has a healthy cash flow.
The test will take into account all expenses – such as pay, bills, and supplies – and see whether they can be met on time.
If the answer is no, the business is insolvent.
Balance Sheet Test
This test compares the assets of a business to its liabilities.
All of the business’s assets must be added up – including property, stock, company cash, equipment, etc – before being compared to the company’s total debt.
If the business has more liabilities than assets, it is insolvent.
Risks of Operating While Insolvent
Continuing to trade while insolvent, whether knowingly or unknowingly, can leave you legally exposed. Continuing to trade typically makes the position of creditors worse, so it can open you up to accusations of misfeasance, wrongful trading, or fraudulent trading.
These charges carry a range of potential consequences:
- Disqualified from acting as a director between 2-15 years
- Issued with large fines
- Made personally liable for company debts
- Imprisoned for up to 10 years
While the more severe consequences are very rare, becoming personally liable for company debts is a real possibility. This can have big consequences depending on the size of the liability; if you can’t afford to repay, you may be forced into personal bankruptcy.
If you think your business is insolvent, it’s important that you seek advice straight away.
What to Do if Your Company Is Insolvent
If you think your company is insolvent you should enlist the help of an insolvency practitioner as soon as possible.
We’ll let you know if your company is insolvent and inform you as to what is your best option going forward. In some cases, we may suggest a CVL to provide a clean exit from the business. In others, where it appears there is a chance for a successful turnaround, we may suggest a CVA or administration.
No matter the situation, we can put a firm end to your spiralling debt worries and reduce any potential fallout going forward.
Contact us to arrange a free consultation today.
