Insolvency tests and warning signs
Is your company insolvent — or showing signs of financial distress?
Missing one payment does not necessarily mean your company is insolvent. Equally, a healthy order book, a reported profit or valuable assets do not necessarily mean it is safe to carry on as normal. Insolvency is often unclear from the inside, and the point at which a director’s duties change is rarely obvious at the time. This page sets out the two tests, the warning signs that matter, and what to do next.
You do not need to have concluded that your company is insolvent before speaking to us.
The short answer
Is my company insolvent? The two legal tests
A company may be insolvent if it fails either of two principal tests. It does not have to fail both.
Test one
The cash-flow test
Can the company pay its debts as they fall due — including liabilities falling due in the reasonably near future?
Test two
The balance-sheet test
Do liabilities — including contingent and prospective liabilities — exceed the realistic value of the assets?
- The tests are not mutually exclusive, and passing one does not establish overall solvency.
- The assessment is forward-looking as well as about today.
- The quality of the financial information matters as much as the numbers themselves.
- A temporary funding gap needs different analysis from a sustained inability to pay.
Insolvency is about more than whether there is money in the bank today.
Test one
The cash-flow test, in practice
The central question is whether the company can meet its debts when they fall due, taking account of what is coming as well as what is already overdue. These are the questions we would work through with you:
- Can payroll be met on time?
- Can VAT, PAYE and corporation tax be paid when due?
- Are suppliers being paid within agreed terms?
- Are direct debits or finance payments being returned?
- Is the company permanently at its overdraft limit?
- Is one expected receipt needed to pay several liabilities?
- Are directors personally funding routine operating costs?
- Is one creditor being delayed in order to pay another?
- Are suppliers placing accounts on stop, or asking for cash in advance?
- Have previous payment arrangements failed?
- Could the company meet a normal but unexpected expense?
- Is new customer money being used to pay much older debts?
- Is there enough working capital for the next 13 weeks?
Missing a single payment does not prove insolvency. A repeated or sustained inability to pay is a serious warning sign — and a company can report a healthy profit while being cash-flow insolvent, because revenue, accounting profit and available cash are three different things.
Test two
The balance-sheet test, and why the accounts may not answer it
This test asks whether the value of the assets is less than the liabilities, taking account of contingent and prospective liabilities. Statutory accounts are prepared on a going-concern basis, so they often do not answer it. The assessment may need to adjust for:
- Stock unsaleable at book value
- Old or disputed customer debts
- Property and equipment realisation values
- Goodwill worth little in a distressed sale
- Tax liabilities
- Employee liabilities
- Lease obligations
- Asset-finance settlements
- Guarantees and indemnities
- Litigation, warranty and customer claims
- Future contractual liabilities
- Group-company balances
- Director’s loan accounts
- Secured lending
- Interest and enforcement costs
- Contingent and prospective claims
Book value, market value and insolvency-sale value can differ materially — and it is the realistic figure that matters, not the one in the accounts.
Two illustrations
How this looks in real companies
Example one
Profitable, but cash-flow insolvent
A contractor’s management accounts show a £180,000 profit for the year and the order book is strong. But £340,000 is owed by one customer who has stretched to 90 days, and this month the company owes £95,000 in wages, £60,000 in VAT and £120,000 to subcontractors — all falling due before that customer is expected to pay.
Profitable on paper, and unable to pay its debts as they fall due. The reported profit does not answer the cash-flow test.
Example two
Paying its bills, but balance-sheet insolvent
A distributor pays everything on time. Its accounts show £600,000 of assets against £450,000 of liabilities. But the stock would realise perhaps half its book value, there are eight years left on a lease with £200,000 of dilapidations exposure, and a customer has issued a claim for £250,000 that the company disputes.
Currently paying its way, and arguably balance-sheet insolvent once contingent and prospective liabilities are valued realistically.
Illustrative examples only. The figures are invented to show the principle, and neither describes a real client.
Where does the company sit?
Temporary pressure, financial distress, or insolvency?
| Position | What it may look like | What it may mean |
|---|---|---|
| Temporary cash pressure | A short-term funding gap, with reliable incoming cash behind it. | May be manageable through forecasting, negotiation or funding. |
| Financial distress | Repeated arrears, declining margins, or creditor pressure building. | Requires prompt review and corrective action. |
| Cash-flow insolvency | The company cannot pay its debts as they fall due. | Directors must consider creditors’ interests, and should obtain advice. |
| Balance-sheet insolvency | Realistic liabilities exceed the realistic value of the assets. | Requires assessment of contingent and future obligations. |
| Imminent insolvency | Not insolvent today, but likely to become so on any realistic view. | Early intervention may preserve more options than waiting. |
These are not fixed legal verdicts, and they overlap. A company can move between them in either direction within a quarter.
Financial health check
Fifteen questions worth answering honestly
Work through them on paper or in your head. Nothing here is sent anywhere and nothing is recorded — there is no form and no tracking on this page.
This is an initial screening aid. It is not a formal solvency assessment, and it cannot tell you whether your company is insolvent.
Five that carry more weight
A yes to any one of these is enough on its own to justify a review.
- Has the company missed a payroll run, or paid wages late?
- Have payment plans with HMRC or other creditors failed?
- Has the company received a statutory demand, judgment or winding-up petition?
- Are personally guaranteed creditors being paid ahead of others?
- Have assets been sold or transferred to connected parties — or is that proposed?
Seven more where a yes is the concern
- Has it missed VAT, PAYE, corporation tax or pension payments?
- Are suppliers regularly being paid outside agreed terms?
- Are returned payments or failed direct debits becoming common?
- Are directors regularly lending money to meet ordinary running costs?
- Is the company relying on one uncertain receipt to pay several liabilities?
- Have suppliers stopped credit, or demanded payment in advance?
- Would stopping new sales reveal losses on existing contracts?
And three where a no is the concern
- Is the business profitable after all genuine operating costs?
- Does the company have enough working capital for the next 13 weeks?
- Are management accounts and tax returns up to date?
Reading your answers
Continue monitoring
No weighted questions, and few concerns overall. Keep monitoring cash flow, liabilities and future commitments. This is not confirmation that the company is solvent.
A review would be sensible
Several concerns, or one weighted question. A detailed review of cash flow, liabilities, asset values and future commitments would be sensible, and the sooner it happens the more options tend to remain. Arrange a confidential review →
Prompt advice recommended
Two or more weighted questions, or six or more concerns in total. Please obtain professional advice promptly — particularly before making unusual payments, taking additional credit or disposing of assets.
The single most useful tool
The rolling 13-week cash-flow forecast
If you do one thing after reading this page, do this. A weekly forecast covering the next thirteen weeks tells you more about the company’s real position than a set of annual accounts — and it is the document any adviser, lender or creditor will ask for first.
Each week it should show opening cash, expected customer receipts, payroll, VAT and PAYE, corporation tax, rent and rates, supplier payments, finance and lease payments, insurance, essential operating costs, any planned asset purchases, a contingency allowance, closing cash, and the headroom left on any facility.
Where forecasts usually go wrong
- Receipt dates set to when you hope, not when customers actually pay
- Confirmed receipts not separated from hoped-for sales
- Tax left out, or understated
- Seasonal fluctuations ignored
- Built once and never updated
- Forecast never compared against what actually happened
- No downside scenario modelled at all
Update it every week, and compare it with the actual result. The gap between the two is usually the most informative number in the business.
Warning signs, by severity
What to watch for, and when it becomes urgent
Early concerns
- Declining margins
- Customers paying more slowly
- Increasing overdraft use
- Reduced cash reserves
- Heavy dependence on one customer
- Stock sitting longer
- Management accounts arriving late
- Growing reliance on short-term funding
- Payment dates repeatedly moved
Serious warning signs
- HMRC arrears
- A failed Time to Pay arrangement
- Suppliers placing accounts on stop
- Wages paid late
- Returned direct debits
- County court judgments
- Directors funding payroll
- Loss of trade credit insurance
- Customers withholding payment over disputes
- No reliable cash-flow forecast
Urgent — take advice now
- A statutory demand
- A winding-up petition
- Enforcement officers attending
- A bank facility being withdrawn
- A frozen or restricted bank account
- Threatened repossession of essential assets
- Landlord forfeiture action
- Loss of a critical contract or licence
- Insufficient funds for imminent payroll
- Assets at immediate risk
HMRC
Does owing tax mean the company is insolvent?
Not by itself. But a repeated inability to pay tax when it falls due is one of the most reliable early indicators there is, because VAT and PAYE are usually the first liabilities a business under pressure quietly starts to stretch.
The difficulty is that using future tax money to fund current trading does not solve anything — it moves the problem forward and makes it larger. A Time to Pay arrangement may well be available in the right circumstances, but it only works if the company can also meet its future tax as it arises. A failed Time to Pay arrangement is a serious indicator, and it is worth assuming HMRC will not extend terms repeatedly.
Whatever else your forecast does, it should include all current and future tax. Turnaround and rescue options →
Two common misconceptions
“We’re profitable, so we can’t be insolvent”
Accounting profit, cash generation and available working capital are different things. Rapid growth consumes cash. Stock ties it up. Profitable invoices go unpaid. Long customer terms against short supplier terms create a permanent gap. Loan repayments are not fully reflected in profit. Tax falls due before receipts arrive. And loss-making legacy contracts hide inside a healthy-looking turnover figure.
“We have valuable assets, so we’re fine”
A company can be cash-flow insolvent while holding real value, if it cannot convert that value into cash in time. Property does not sell quickly. Equipment is needed to trade. Stock has limited resale value. Assets may be subject to finance or security. Debts owed to the company may be disputed. Investments may be hard to value. A forced sale realises less. And a disposal may itself create a tax liability.
Directors’ duties
When your duties change
While a company is comfortably solvent, directors generally act to promote its success for the benefit of its shareholders. As insolvency develops or becomes probable, creditors’ interests become increasingly important. Once the company is insolvent, the focus is on protecting creditors and minimising avoidable loss.
That shift is gradual and fact-specific. It does not happen on a date that an online test can identify, which is precisely why the decisions taken around it need to be recorded and, where material, advised on.
Taking professional advice is not an admission of wrongdoing. It is usually evidence that directors are taking their responsibilities seriously.
What that means in practice
- Monitoring the financial position properly, and often
- Protecting the company’s assets
- Maintaining complete records
- Treating creditors’ interests fairly
- Avoiding improper preferences
- Avoiding transactions that remove value from the company
- Considering whether continued trading improves or worsens the outcome
- Taking professional advice
- Recording board decisions, and the information relied on
- Keeping every director informed — including non-executive and less active ones
Do now
What to do this week
- Preserve all books and records
- Produce an accurate creditor list
- Prepare a 13-week cash-flow forecast
- Bring management information up to date
- Identify all secured lending
- List every personal guarantee
- Review asset ownership and finance
- Identify current and future tax liabilities
- Record board discussions and decisions
- Assess whether new work is genuinely profitable and cash-positive
- Review unusual or connected-party transactions
- Take advice before any material decision
One caution: do not automatically stop trading without advice. Stopping abruptly can destroy value that would otherwise have reached creditors — while continuing to trade at a loss can deepen their losses. Which risk applies to you is a question of fact.
Do not do without advice
Before making unusual payments or moving assets, take advice.
- Repaying directors, shareholders or family members
- Paying personally guaranteed creditors ahead of others
- Transferring assets to a new or connected company
- Selling assets below market value
- Declaring or paying dividends
- Taking new credit without a reasonable basis for repaying it
- Moving customer receipts away from the company
- Continuing contracts known to be heavily loss-making
- Allowing records to become incomplete
- Ignoring statutory demands or court papers
- Striking off a company with unresolved debts or assets
Some of these may be perfectly justifiable commercially. The point is that the decision should be properly considered, properly advised and properly recorded — not made quickly under pressure.
Trading on
Can an insolvent company keep trading?
There is no honest yes-or-no answer, and anyone giving you one on a website is guessing. Insolvency does not always mean trading must stop immediately. What matters is whether continuing improves or worsens the position of creditors as a whole.
The questions that decide it: is the underlying business viable? Is new work profitable and properly funded? Can new liabilities be paid as they arise? Is there a credible rescue, sale or refinancing in progress? Is the additional funding actually committed, or merely hoped for? Are creditor losses likely to increase? And what happens if the expected rescue does not complete?
Get fact-specific advice, keep the decision under regular review, and record the basis for it each time.
Work it through
Three questions decide what happens next, and the middle one — whether the underlying business is viable — is the one almost nobody can answer about their own company. We have set it out as a step-by-step path, with the four tests we actually apply.
Personal exposure
Am I personally liable?
Limited-company debts do not normally become a director’s personal debts merely because the company becomes insolvent. Exposure comes from specific things: personal guarantees, an overdrawn director’s loan account, wrongful or fraudulent trading, misfeasance or breach of duty, improper dividends, transactions at an undervalue, preferences, unpaid share capital, personally owned assets used by the company, or breach of tax or other statutory obligations.
Insolvency and personal liability are separate questions. Both may need assessing, but one does not automatically establish the other.
On personally guaranteed debts: do not automatically prioritise a creditor because you have guaranteed its debt. The guarantee is separate from the company’s liability, so paying that creditor may benefit you personally — which creates a conflict of interest a liquidator would later examine. Review the security and guarantee terms, and take advice before making selective payments or agreeing a personal settlement. A company insolvency procedure does not release the guarantor.
On an overdrawn loan account: money you owe the company is generally a company asset. Establish the balance accurately, and do not assume dividends can be declared retrospectively to remove it or that it can be informally written off — tax may already have arisen. Our guidance note explains this →
Before the formal options
Can the business still be saved?
Often, yes — and it is the first question we ask, not the last. Early intervention may allow an operational turnaround, cost and margin improvement, better credit control, working-capital management, an HMRC Time to Pay arrangement, informal creditor arrangements, refinancing, new investment, a sale of non-core assets, a Company Voluntary Arrangement, administration, a sale of the business, or an orderly wind-down on far better terms than a forced one. Not every company can be rescued. But the earlier we see the full position, the more of those options are still genuinely available.
Where the underlying business can return to sustainable profitability.
Where a limited number of creditors may agree revised terms.
Where tax arrears can be addressed and future taxes remain affordable.
For a viable but insolvent company that can support an agreed repayment proposal.
Where statutory protection, a rescue or a better-value sale may be achievable.
Where the company is insolvent and a rescue is no longer realistic.
Which of these is right depends on viability, funding, creditor action and the wider facts — not on how many questions you answered “yes” to above.
If formal action has begun
Tell us if creditor action has already started
If the company has received a statutory demand, a winding-up petition, a court judgment, a notice of enforcement, a secured-lender demand, a repossession notice, a landlord forfeiture notice, or notification that a bank facility will be withdrawn, the position needs looking at now rather than next week.
Deadlines can be short — a company normally has 21 days to respond to a statutory demand before winding-up action may follow. A winding-up petition can materially restrict what the company is able to do and can change which appointment routes remain available. Where a debt is genuinely disputed, separate legal advice may be needed. We cannot guarantee that proceedings can be stopped, and we will not pretend otherwise.
The first conversation
What we will look at
Nothing about the initial discussion commits the company to a formal insolvency process. It is a review, and often it ends with a plan that has nothing to do with insolvency at all.
- Current cash
- 13-week cash flow
- Historic and forecast profitability
- Assets and realistic realisation values
- Present, contingent and prospective liabilities
- HMRC arrears and future tax
- Employees and payroll
- Secured lending
- Personal guarantees
- Director’s loan accounts
- Property and leases
- Key contracts
- Creditor enforcement
- Recent transactions and connected parties
- Working-capital requirements
- Underlying business viability
- Available funding
- Likely outcomes under each option
Why CRG
We would rather see you early than late.
CRG is an independent, family-run insolvency and financial recovery practice, based in Lincolnshire and advising companies throughout the UK, with over 80 years’ combined experience between us. A good deal of our work involves companies that never enter a formal procedure at all.
- Rescue and turnaround considered before any formal procedure
- Commercial and technical assessment, explained without judgement
- Direct access to experienced insolvency professionals
- A knowledgeable team behind them, so the detail gets done properly
- We work alongside your accountant, solicitor, lender and tax adviser
- A free, confidential initial consultation
Questions
Frequently asked questions
Can a company fail only one of the tests?
Yes, and it happens often. A company can be cash-flow insolvent while its balance sheet looks sound, or balance-sheet insolvent while it is still paying everything on time. Failing either test may mean the company is insolvent, and passing one does not conclusively establish overall solvency.
Does missing one payment mean the company is insolvent?
Not by itself. A single missed payment can be an administrative error or a one-off timing problem. What matters is whether the inability to pay is repeated or sustained, and whether the company can meet what is falling due in the reasonably near future as well as what is already overdue.
Does owing HMRC mean the company is insolvent?
Not automatically. But a repeated inability to pay tax when due is one of the most reliable early indicators, because VAT and PAYE are usually the first liabilities a stretched business starts to delay. A failed Time to Pay arrangement is a particularly serious sign, and it is unwise to assume HMRC will extend terms repeatedly.
How far ahead should we be looking?
Far enough to see the liabilities that are coming, not just the ones that have arrived. A rolling 13-week cash-flow forecast, updated weekly and compared against actual results, is the practical standard — and it is the first document any adviser, lender or creditor will ask to see.
Should an insolvent company stop paying creditors?
That is not the right question, and acting on the wrong answer creates risk. The issue is not whether to stop paying, but whether payments are being made in a way that improperly prefers one creditor over others — particularly a connected party or a personally guaranteed debt. Essential suppliers can often still be paid where doing so preserves value for creditors as a whole. Take advice on the specific payments you are contemplating.
Can I repay a debt I have personally guaranteed?
Be careful. The guarantee is separate from the company’s liability, so paying that creditor ahead of others may benefit you personally — a conflict of interest a liquidator would later examine, and a potential preference. Review the security and guarantee terms and take advice before making selective payments or agreeing a personal settlement.
Can the company pay dividends while under financial pressure?
Dividends can only lawfully be paid out of distributable profits, and paying them when the company is insolvent or heading that way is one of the more common ways directors create personal exposure. Where profits turn out not to have been there, dividends already drawn are frequently reclassified as loans. Take advice first.
Can assets be transferred to a new company?
Not informally, and not cheaply. Transactions at an undervalue and transfers to connected parties are precisely what an office holder reviews, and there are also strict restrictions on using the same or a similar company name after a liquidation. A properly valued, transparent, advised transaction may be possible; an informal one creates serious risk.
Are all directors responsible for understanding the finances?
Yes. The duty is not confined to the finance director or the most active board member. Non-executive and less involved directors carry the same duties and should be given the same information — being uninformed is not a defence, and an office holder reviewing conduct will look at what each director knew or ought to have known.
What should I do after receiving a statutory demand?
Act on it that day. A company normally has 21 days to respond before winding-up action may follow. If the debt is genuinely disputed, separate legal advice may be needed quickly. Ignoring it is the single worst option, and the available routes narrow as the process advances.
Can a winding-up petition be stopped?
Sometimes, depending on the facts, the stage reached and whether the debt is disputed or can be dealt with. A petition materially restricts what the company can do and can change which appointment routes remain open. We cannot guarantee that any proceedings can be stopped, and nobody honestly can.
Does taking advice mean the company must go into liquidation?
No — and a good deal of our work involves companies that never enter a formal procedure. The initial discussion is a review of the position and the options. Taking advice is not an admission of anything; it is usually evidence that directors are taking their duties seriously.
Is speaking to an insolvency practitioner confidential?
Yes. The initial conversation is confidential and free, and nothing is reported or filed as a result of it. You are not on a register because you asked a question.
Should I speak to my accountant first?
Speak to whoever you trust. Many of our instructions come through accountants, and we are happy to review a position alongside them — often that is the most efficient way to do it.
Next step
You do not need to work out whether your company is insolvent before speaking to us.
We will help you understand its current position, the risks that need managing, and the options that remain. Your initial consultation is free and confidential.
General information about the law and practice of England and Wales, not a formal solvency opinion or personalised legal advice. Insolvency law differs in Scotland and Northern Ireland.