Is my business insolvent, will be a question many small business owners will be asking themselves during this recession. It is crucial to understand this as it will affect your decision whether to take formal insolvency advice.

The classic definitions of insolvency are that your assets are less than your liabilities or you cannot pay your debts as and when they fall due.

However there are a number of other factors which also give clues as to insolvency. I intend to produce a series of articles each dealing with some points to bear in mind. Taking the two tests above as our lead we have:-

1) The cash flow test; simply can the business pay its debts when they become due for payment. The most common example of this is a failure to pay PAYE and NIC to the Revenue on time each month. They always appear as a creditor in any liquidation. Similarly, if you have suppliers who grant you 30 days credit, are you pushing these repayments beyond 60 days.

2) The Balance Sheet test; or the do you owe more than you own test. This needs honest consideration as a cursory glance of balance sheet may indicate that it is solvent, but on closer inspection some items such as stock may be overstated or plant and machinery not written down correctly, and debtors and work in progress not readily collectable. Taking these into account it may be that the balance sheet looks very different.

3) The Legal processes test; The simple test here is whether the company is receiving letters before action, or even worse, writs or summonses. These legal actions may sometimes result from an oversight and can be simply paid, however if they are not and are repeated and not settled then this is an indication that cash is not readily available and action needs to be taken.

As directors you need to be wary of these as there are penalties for wrongful trading of up to 15 years disqualification as a director.

If you are in any doubt whatsoever make sure you take professional advice.

Information provided by Steve Thatcher of Help With Debt (UK) Limited and total debt solutions company. For all further reading see http://www.helpwithdebtuk.com
For personal contact email sthatcher@helpwithdebtuk.com
For Steve’s thoughts see http://steves-debt.blogspot.com

If you have any debt problem whatsover either personal or corporate make Steve your first call all advice is free. Finally if in the UK and you need a friend to speak to call 01162171406

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