How Do You Know If Your Company Is Insolvent?

Insolvency occurs when a company is unable to meet its financial obligations. This may be due to a lack of available cash to pay bills when they fall due, or because the total liabilities exceed the value of the company’s assets. For business owners, recognising the signs of insolvency early is crucial — not only to protect the business but also to limit personal exposure and fulfil your legal duties as a director.

At Chamberlain & Co, we understand that facing financial distress is one of the most difficult challenges a business owner can encounter. With over 25 years’ experience, our team is here to support you with practical, confidential advice to help you navigate insolvency and business recovery.

The Cashflow Test For Insolvency

The cashflow test is one of the most commonly used methods to determine if a company is insolvent. This test considers whether your business can pay its debts when they are due. If you’re regularly deferring payments, missing deadlines with HMRC, or struggling to pay wages or suppliers, these are red flags that indicate cash flow insolvency.

This situation can creep up gradually — perhaps you’re managing on a month-by-month basis, prioritising urgent payments and leaving others unpaid. Eventually, this juggling becomes unsustainable. If your business is relying heavily on director loans or new credit to stay afloat, it’s time to assess whether insolvency advice is needed.

The balance sheet test

The balance sheet test assesses the overall financial health of your company by comparing its assets against its liabilities. If the total amount your business owes (including debts, outstanding tax, and any potential or contingent liabilities) is more than the value of what it owns (such as stock, cash, equipment, or receivables), then the business may be balance sheet insolvent.

This test can sometimes be less obvious than the cashflow test, particularly if the company is still trading or bringing in revenue. However, hidden liabilities or unpaid taxes can tip the balance. A professional review of your financial statements can help determine if you’re trading while technically insolvent.

The legal action test

This test focuses on whether legal steps have been taken by creditors in an attempt to recover debts. If a creditor has issued a statutory demand and you fail to respond within 21 days, or if a winding up petition has been filed at court, your company is at serious risk of being forced into compulsory liquidation.

Legal actions such as county court judgments (CCJs), bailiff visits, or HMRC enforcement are strong indicators that your business is under significant financial stress. Once legal action begins, options become limited, and acting early to resolve the situation can prevent long-term damage to you and your business.

What are the warning signs of company insolvency?

Recognising the early warning signs of insolvency allows you to act before matters worsen. Common indicators include mounting debt, consistent cash flow issues, frequent calls from creditors, and pressure from HMRC for unpaid VAT or PAYE. You may also find it difficult to obtain new credit, or experience a decline in sales or profit margins.

Other signs can include falling behind on rent, using personal funds to keep the business running, or an increasing reliance on short-term borrowing. Ignoring these symptoms can lead to more serious consequences, including creditor action or director liability for wrongful trading.

Is my company solvent or insolvent?

To determine whether your business is solvent, you need to look at both the cashflow and balance sheet position. Can your business pay its debts as they fall due? Are your liabilities still less than your assets? It’s important to review not just today’s finances, but upcoming obligations and potential risks.

If you’re uncertain about where your company stands, speak to a licensed insolvency practitioner. We can provide an independent assessment, helping you understand the legal and financial implications — and guiding you through your next steps with clarity and discretion.

What Can I Do If My Company Is Insolvent?

If your business is insolvent, your focus must shift from trying to protect shareholders to acting in the best interests of creditors. This might mean stopping trading, freezing spending, or limiting new liabilities. Importantly, directors should not continue to trade if there’s no reasonable prospect of avoiding insolvency, as this can lead to personal consequences.

Several options exist depending on your circumstances. A Creditors’ Voluntary Liquidation (CVL) is a common route for closing an insolvent company, while a Company Voluntary Arrangement (CVA) or Aadministration may allow for restructuring and business recovery. Chamberlain & Co can help you understand which option is most appropriate for your business and your future.

How do I close a solvent company?

If your company is solvent but you’ve chosen to cease trading — whether due to retirement, a business sale, or personal reasons — a Members’ Voluntary Liquidation (MVL) may be the most tax-efficient way to close it. This process allows retained profits to be distributed to shareholders in a way that may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), offering tax savings.

An MVL requires a formal declaration of solvency and must be managed by a licensed insolvency practitioner. Our team will guide you through the process, ensuring compliance and helping you make the most of available tax reliefs.

How do I close an insolvent company?

For businesses that can no longer trade due to insolvency, the most common closure route is a Creditors’ Voluntary Liquidation (CVL). This allows directors to take control of the process rather than waiting for creditors to force closure through the courts.

In a CVL, an insolvency practitioner will manage the orderly winding-up of the business, sell company assets, and distribute funds to creditors in a fair and transparent way. It also offers some protection to directors, especially where action is taken responsibly and in good faith.

How to check the solvency of a company?

Checking solvency requires an up-to-date understanding of your financial position. This includes reviewing cash flow forecasts, profit and loss statements, and your balance sheet. Monitoring debt levels and ensuring you’re not relying too heavily on external finance or delaying payments to survive is also important.

You should also factor in any contingent liabilities — such as unresolved legal disputes, loan guarantees, or potential tax penalties. Regular financial reviews and independent advice can help catch warning signs early.

The importance of protecting creditors during insolvency

Once a company is insolvent, directors have a legal obligation to prioritise the interests of creditors. Continuing to trade in the hope things improve — particularly if you’re taking on new liabilities — can expose directors to wrongful trading claims, personal liability, or disqualification from acting as a director in the future.

Protecting creditors means taking responsible action at the earliest stage. Seeking professional advice, keeping accurate records, and avoiding preferences or undervalue transactions are key. At Chamberlain & Co, we help directors navigate these duties with integrity and clarity.

How Can Chamberlain & Co Help You?

Facing insolvency is never easy — but you don’t have to face it alone. Chamberlain & Co has been supporting business owners across the UK for over two decades, offering tailored solutions and honest, practical advice. Whether you need help closing an insolvent company, assessing your financial position, or exploring turnaround options, we are here to help.

Our firm is regulated by the Institute of Chartered Accountants in England and Wales (ICAEW), ensuring the highest standards of professionalism and transparency. Every business is different — and so is our approach. We take time to understand your specific circumstances before advising on the best course of action.