How To Tell If Your Business Is Insolvent

Running a business is never easy. Even during periods of success, maintaining that success is a struggle that most of us have never felt before. Oftentimes, the ultimate failure of your business comes from a series of broader events outside of your control and not any specific decisions you made along the way. That’s difficult to take, but the truth of the matter if your business couldn’t stand up to the pressures of its environment, then it probably wasn’t meant to be. It is possible to draw strength from that though, but first you have to consider insolvency. So, what does that mean, and how do you judge if your business is insolvent?

There are two descriptions for insolvency, and which one applies to you will depend on whether your business or you personally are insolvent. If it’s the latter, you’ll probably know it by the name bankruptcy, as that’s a much more common term. Insolvency is a term usually used within business only, and for the purposes of this article we will focus on business insolvency alone. For either, the same basic rule applies; if you or your company are unable to pay your debts, under English law you will be considered insolvent.

There are two tests that you can apply to your business to determine whether the law would consider your business or company insolvent, which are as follows:

– The balance sheet test: Take a look at your company’s assets and determine whether they are greater or less than the amount of its liabilities. If your assets are less than your liabilities then the law would consider your business insolvent. Keep in mind that you should take into account any likely future liabilities your business will take on.

– The cash flow test: Is your company going to be able to pay its debts or future debts on the date they are due? If the answer is yes, your company is insolvent.

If either or both of those tests returned positive for you, your business it likely insolvent. Hiring an insolvency lawyer and insolvency practitioner are crucial in ensuring that the dissolving of your business, the distribution of assets, the recovery of assets and much, much more. Losing your business to insolvency is never easy, but it becomes immeasurably more difficult of you attempt to walk that path alone, and could end up costing you and your business much more than you would’ve paid in the first place.

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