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INSOLVENCY - What Does it Mean?
There are generally two tests
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the moment when the company becomes
unable to pay its debts as they full due. This is often
referred to the cash flow test |
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the moment at which the company’s
liabilities exceed the value of its assets. This is commonly
referred to as the balance sheet test |
Cash flow test
When it comes to avoiding insolvency proceedings cash is king.
If a creditor asks for money and cannot be paid then under the
cash flow test you are insolvent and at risk of being wound
up. This fact does not change even if you are making a profit.
At this point the twilight period commences and transactions
entered into by a company are at risk to attack and/or the directors
and others involved in the management of the company are at
risk of incurring personal liability
Balance Sheet test
In addition to the liabilities recorded in your accounts other
liabilities are taken into account in determining whether you
are technically insolvent. The types of liabilities arise generally
arise when the business stops trading, for instance breach of
contract or redundancy liabilities and other employee entitlements
which can be very significant for a long standing company with
loyal staff.
For more information or to arrange
your initial FREE consultation please telephone Mark Botwood
on (01902) 393007.
QUESTIONS
Can directors incur further
credit during the twilight period?
If insolvency has been determined or there is a possibility
of insolvency then the directors overriding duty is to the company’s
creditors as it is the creditors money which is now at risk
and not that of the shareholders. If there is not a reasonable
prospect of the company avoiding insolvent liquidation then
the directors must do everything to minimise the loss to creditors.
Incurring further credit may be seen in some instances to be
fraudulent but there is a balance to be met between what a reasonable
business man would do for the benefit of the company and its
creditors, and on the other hand, the act of exploiting and
continuing a business at the expense of creditors. There is
no easy answer. Before acting consult our Insolvency and Corporate
Recovery experts.
For more information or to arrange
your initial FREE consultation please telephone Mark Botwood
on (01902) 393007 |
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