Insolvency does not usually happen overnight. In most cases there are warning signs, sometimes months or even years before a business reaches the point of crisis. Recognising these signs early and taking professional advice is the single most important thing a director can do.
The two tests for insolvency
Under UK insolvency law, a company is insolvent if it meets either of two tests:
- Cash flow test: the company cannot pay its debts as they fall due
- Balance sheet test: the company’s liabilities exceed the value of its assets
In practice, the cash flow test is the most commonly applied. If your company is struggling to pay its bills on time, it may already be insolvent.
Warning signs to look for
Cash flow pressure
- Regularly paying suppliers late or only paying when chased
- Relying on one-off injections of cash (loans, director loans, asset sales) to meet ongoing obligations
- Overdrawn on trade accounts or regularly exceeding credit limits
- Difficulty meeting payroll or PAYE/NIC obligations on time
Creditor pressure
- Receiving County Court Judgments (CCJs) or statutory demands
- Contact from HMRC enforcement teams
- Threats of winding-up petitions from creditors
- Loss of credit insurance or credit terms from suppliers
Trading performance
- Declining revenues over consecutive periods
- Shrinking gross margins
- Loss of key customers or contracts
- Increasing stock of unsold goods
Balance sheet deterioration
- Net liabilities on the balance sheet
- Growing HMRC debt (VAT, PAYE, corporation tax)
- Secured debt approaching or exceeding asset values
- Overdue auditor or accountant fees (which may indicate avoidance of bad news)
Behavioural indicators
- Directors deferring their own salary or making increasing personal loans to the company
- Avoiding contact with the company’s accountant or bank
- Taking on increasingly risky or unprofitable work to maintain cash flow
- Reluctance to prepare or review management accounts
What should you do?
If you recognise any of these warning signs, the most important step is to take professional advice immediately. A licensed insolvency practitioner can assess your company’s position quickly and confidentially, explain the options available, and help you make informed decisions.
Early intervention often leads to better outcomes: for the business, for creditors, for employees and for directors personally.
Free consultation
Mackay Goodwin’s licensed insolvency practitioners are available for a free, confidential initial consultation. Call us on 0151 739 2398 or use our online contact form.
