Company Insolvency: What is it and what does it mean?
In the past decade, the economy has been especially turbulent for many businesses. As a result of this economically difficult time it has severely stunted the growth of a number of companies and in some cases has led to liquidation.
Company Insolvency happens as a result of a company being unable to pay its debts. There are two tests that are carried out in this instance to determine corporate insolvency. The first is the cash flow test which looks into whether the company currently or in the future will be unable to pay their debts and when this will happen. The second is a balance sheet test which ascertains what the value of the company’s assets are and are they less than the amount of its liabilities, present and future. If in either of these tests the evidence points to the answer being yes then the company will be deemed as being insolvent.
What does this mean for a company?
There are a number of potential consequences of company insolvency, some of which have been listed below:
- One of the biggest consequences that will affect directors of a company is the increased risk to their position. If they continue to trade and put shareholders at risk after insolvency has been established, they run the risk of encountering tarnishing their professional reputation.
- The company will be unable to dispose of any assets once a winding up petition has been served. If they want to trade/sell/dispose of assets they will have to receive authorisation from the court to do so.
- If you are a sole trader you are at risk of having to sell your personal assets in order to repay any debts. This debt can include any faulty work/products supplied to customers, suppliers, HM Revenue and anyone else your business owes money to.
- Business owners can also run into problems if they are proven to have misbehaved whilst running their business. Bankruptcy restriction orders can be put in place against sole traders with businesses.