Several tests can be applied to determine when a company is legally insolvent. Generally speaking, when the company can’t pay its debts as and when they fall due, or when its liabilities are higher than its assets, it is insolvent. When is a company insolvent is often the first sign of a problem and this can be the result of a change in market conditions, slowing demand for products or bad credit control procedures.

Insolvent companies will usually appoint an insolvency practitioner to handle all legal processes related to winding up the business, selling off assets and distributing proceeds to creditors. The three main insolvency proceedings are restructuring, bankruptcy and liquidation. The choice of process depends on the type of insolvency (cash flow, balance-sheet or both) and the position of the creditors.

When Financial Troubles Hit: Recognizing Signs of Business Insolvency

Directors of insolvent companies are exposed to a high level of personal liability for unpaid debts and they must work with an insolvency expert to minimise their losses. The law sets out rules about which creditors must be paid and when. If the insolvent company is sold to a new entity, the original directors may be required to take on some or all of the liabilities of the new business.

Insolvency is not necessarily the end for a business and there are many ways to recover from insolvency. The key is to act early and seek advice from a licensed insolvency practitioner who can provide an independent review of the situation and recommend the best course of action. In some cases, a proposal process such as a Company Voluntary Arrangement can be approved and this provides breathing room for the company to continue trading while paying back what it owes in an agreed timeframe.