Is my company insolvent? A company is legally insolvent when it either cannot pay its debts as they fall due, or its liabilities exceed its assets on the balance sheet. These are the two tests set out in the Insolvency Act 1986, and either one on its own is enough to make a company insolvent in law.
Many directors sense trouble long before they have a definite answer. Cash is tight, a supplier has been pushed back again, or HMRC has sent a reminder that used to feel routine and now feels urgent. This guide walks through both legal tests in plain English, the practical warning signs that usually appear alongside them, and what your options are once you know where you stand.
None of this is legal or financial advice. It is a starting point so you can have a clearer conversation with a regulated specialist when you are ready.
Is my company insolvent? What 'insolvent' legally means
In UK company law, insolvency is not about how you feel or how the bank balance looks on a bad Friday. It is a defined legal state. Section 123 of the Insolvency Act 1986 sets out when a company is "unable to pay its debts", and that definition is what courts, creditors and insolvency practitioners actually use.
So what does insolvent mean for a company in practice? It means the company itself, as a separate legal entity, cannot meet its obligations — not that the business has necessarily failed for good, and not a reflection on the director personally. There are two separate legal tests, and a company only needs to fail one of them to be insolvent:
- The cashflow test — can the company pay its debts as they become due?
- The balance sheet test — do the company's assets, fairly valued, cover its liabilities, including contingent and prospective debts?
A company can fail the cashflow test while its balance sheet still looks reasonable on paper — this is common when money is tied up in stock, debtors or a large contract that has not yet been paid. Equally, a company can fail the balance sheet test while still managing to pay bills each month, often by running down reserves or relying on a director's personal support. Understanding both tests is the real answer to how to tell if a company is insolvent, rather than relying on a single gut feeling.
The cashflow test in plain terms
The cashflow test asks a simple, practical question: can the company meet its debts when they fall due, including debts that are due now and those reasonably expected soon? It is sometimes called the "commercial insolvency" test because it reflects how a business actually operates day to day.
Signs that a company may be failing the cashflow test include:
- Regularly delaying payments to suppliers beyond agreed terms
- Missing PAYE, VAT or corporation tax payments to HMRC
- Relying on new borrowing simply to pay existing debts
- Receiving a statutory demand for an unpaid debt of £750 or more, with 21 days to respond before further action can follow
One unpaid invoice does not automatically mean a company is insolvent under this test. What matters is the underlying pattern: is there a genuine, ongoing inability to meet debts as they come due, or a temporary timing gap that will resolve itself? Our guide to a business cashflow crisis looks at this distinction, and the practical steps for taking back control, in more detail.
The balance sheet test in plain terms
The balance sheet test looks past the day-to-day cash position and asks a longer-term question: if you added up everything the company owns and everything it owes, including debts that are not due yet, would the liabilities outweigh the assets?
This test matters because a company can appear to function normally — paying wages, keeping suppliers roughly on side — while its underlying position has already tipped into insolvency. Assets are valued fairly, not at their original cost, so a piece of equipment or a stock holding may be worth far less on paper than the company originally paid for it.
Common triggers that push a company toward failing the balance sheet test include:
- A large bad debt written off after a customer fails to pay
- Falling asset values, such as stock that has become unsellable
- Accumulated losses that have eroded shareholder capital
- Contingent liabilities, such as a guarantee, becoming due
Directors often ask which test applies to their company. In practice, both are relevant, and either one being failed is enough for a company to be insolvent. Our companion article on balance sheet vs cashflow insolvency sets the two tests side by side with worked examples.
Practical warning signs that back up the tests
Away from the strict legal wording, most directors recognise insolvency creeping in through everyday signs. These will not answer the company insolvency test UK courts apply on their own, but they are a useful early prompt to check the figures properly.
- Creditors chasing payment more frequently, or threatening legal action
- An overdraft or credit line that is permanently maxed out
- Struggling to meet the payroll run on time
- HMRC arrears building up, particularly PAYE or VAT
- Suppliers moving the company onto pro-forma or cash-on-delivery terms
- Difficulty producing up-to-date management accounts because the picture feels too uncomfortable to look at
None of these signs alone confirms insolvency, but two or three together are usually a strong prompt to run the cashflow and balance sheet tests properly, rather than guessing.
What changes for you once the company is insolvent
Once a company is, or is likely to become, insolvent, a director's legal duties shift. Before insolvency, directors generally owe duties to promote the success of the company for the benefit of its shareholders. Once insolvency is likely, that duty moves toward considering, and eventually prioritising, the interests of creditors as a whole.
This is the point where directors commonly ask am I trading insolvent, and whether continuing to trade is safe. Trading on is not automatically wrong — many companies trade through a difficult period and recover. The risk arises when a director continues trading in a way that knowingly makes creditors worse off, without a reasonable prospect of avoiding insolvent liquidation. Our article on trading while insolvent explains director risk in this period in more depth.
The options if your company is insolvent
Insolvency is not automatically the end of a company, and it is rarely a single, sudden event. Gov.uk sets out the main options for a limited company that cannot pay its debts, and depending on the position, directors typically have several routes to consider with a regulated specialist:
- Turnaround and renegotiation — restructuring debts, costs or contracts where the underlying business is still viable
- A Company Voluntary Arrangement (CVA) — a formal agreement to repay creditors over time while continuing to trade
- Administration — a process that can protect the company from creditor action while a rescue or sale is arranged
- Creditors' Voluntary Liquidation (CVL) — a director-led, orderly closure when the business cannot be rescued
- Compulsory liquidation — where a creditor petitions the court to wind the company up, often as a last resort after unpaid debts
Which option, if any, fits depends heavily on the specific figures, the cause of the difficulty, and how much time is available. This is genuinely specialist territory, which is why the next step for most directors is a conversation with someone qualified to assess it properly.
Why acting early widens your choices
The single biggest factor in how many options remain open to a director is timing. Early on, when cash is tight but assets and trading relationships are intact, turnaround, refinancing and formal rescue procedures such as a CVA or administration are all realistically on the table.
Left later, once creditors have escalated to statutory demands, County Court judgments or a winding-up petition advertised through insolvency notices in The Gazette, the choices narrow considerably, and outcomes are driven more by creditors and the court than by the director. Acting early does not mean panicking or making rushed decisions. It means getting an accurate picture sooner, so decisions are made from a position of information rather than pressure.
How a regulated specialist assesses the position
A regulated insolvency practitioner or solicitor will not rely on a quick impression. They typically review up-to-date management accounts, a full list of creditors and their status, any statutory demands or court proceedings already in motion, and the company's realistic short-term cash forecast.
From that, they can confirm whether the company meets the cashflow test, the balance sheet test, or both, and set out the realistic options available given the timeframe. This is a proper, evidence-based assessment rather than guesswork, which is why it is worth having early rather than waiting until a creditor forces the issue.
Frequently asked questions
Can a company be insolvent but still trading?
Yes. Many companies continue trading while insolvent, and doing so is not automatically unlawful. The key issue is whether directors continue trading responsibly, with a reasonable prospect of avoiding insolvent liquidation, once they know or ought to know the company is insolvent.
How long does it take to find out if my company is insolvent?
Applying the cashflow and balance sheet tests to accurate, up-to-date figures can often be done within days once management accounts and a creditor list are available. The complexity of the company's finances affects how long a full assessment takes.
What happens if I keep trading after my company is insolvent?
Directors can continue trading an insolvent company where there is a genuine, reasonable basis for believing the business can avoid insolvent liquidation. Difficulties arise where trading continues with no realistic prospect of recovery and creditors are left worse off as a result.
Does HMRC treat company insolvency differently to other creditors?
HMRC is often one of the largest and most active creditors for struggling companies, particularly where PAYE or VAT arrears have built up. It can, and does, petition to wind up companies over unpaid tax debts, so HMRC arrears are a common trigger for a formal insolvency process.
Is my company insolvent if I just miss one payment?
Not necessarily. A single missed or delayed payment is not, on its own, proof of insolvency. What matters under the legal tests is the underlying pattern — whether the company can realistically meet its debts as they fall due, or whether liabilities genuinely exceed assets.
This article is general information, not legal, financial or insolvency advice, and every company's position is different. If you would like to talk through where your company stands, Harbourfirst can introduce you to a regulated insolvency specialist who can assess your figures properly — start an enquiry.