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.
Signs Your Business May Be Insolvent
Insolvency is not always obvious. Many companies trade for months - sometimes longer - while technically insolvent, without directors realising it. Recognising the signs early gives you far more options and helps protect you from personal liability.
The Two Tests of Insolvency
A company is insolvent if it fails either (or both) of two tests:
- Cash-flow insolvency - the company cannot pay its debts as they fall due
- Balance sheet insolvency - the company's liabilities exceed its assets
Warning Signs to Watch For
Financial Signs
- Struggling to pay VAT, PAYE, or Corporation Tax on time
- Using one creditor's payment to fund another (robbing Peter to pay Paul)
- Maxed-out overdrafts and pressure from the bank
- Increasing reliance on personal funds or credit cards
- Unpaid supplier invoices and growing creditor balances
- County Court Judgments (CCJs) against the company
Operational Signs
- Losing key customers or contracts
- Difficulty meeting payroll
- Suppliers demanding payment upfront or placing the company on stop
- Pressurised cash flow with no realistic recovery plan
- Legal threats or a winding-up petition
Why Early Recognition Matters
Once you know, or should know, that the company is insolvent, your legal duty as a director shifts from the shareholders to the creditors. Continuing to trade without a realistic plan risks a wrongful trading claim against you personally.
Acting early - taking advice, prioritising creditors, and considering rescue or closure - is the best protection and usually leads to a better outcome for everyone.
What to Do
If you recognise these signs, take professional advice now. Early advice can open rescue options (CVA, administration, restructuring) that may not be available later, and it protects your position as a director.
Speak to a Licensed IP
Our Manchester-based practitioners will assess your company's position honestly and tell you whether it is insolvent and what your best options are - free and confidential.