A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
The balance sheet test and cash flow test for insolvency
UK law defines company insolvency two ways, and a company failing either test is insolvent - with everything that means for directors' duties.
The cash flow test
Can the company pay its debts as they fall due - not eventually, but on time?
The test looks forward as well as backward: debts falling due in the reasonably near future count, so a company covering this month by ignoring next quarter's VAT can fail the test while its bank balance looks alive.
The practical evidence: missed statutory deadlines, creditor triage, and reliance on money that belongs to someone else.
The balance sheet test
Do the company's liabilities exceed its assets - counting contingent and prospective liabilities (guarantees given, claims pending, lease tails) at realistic values, not book values?
It catches the slow failures the cash flow test misses: companies trading punctually on an eroding base until the day the two tests fail together.
Why the tests matter practically
They mark the point where directors' duties shift to creditors, they're the threshold for the formal procedures - from CVLs to a creditor's winding up petition - and they're the sums the Declaration of Solvency swears to in reverse.
If you're honestly unsure which side of either test your company sits, that uncertainty is itself the signal to map the options.
Call our licensed insolvency practitioners in Manchester on 0333 023 5090 - free, confidential, and directly with an ICAEW-licensed IP.
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This page is intended for general information purposes only and does not constitute financial, legal, or professional advice. Always take advice from a licensed insolvency practitioner about your specific position.