What Is Insolvency?
An introduction to insolvency  what it means, when it applies, and the key tests used in the UK.
What Does Insolvency Mean?
A company is insolvent when it cannot pay its debts. In the UK, two tests are used to determine insolvency:
The Cash-Flow Test
Can the company pay its bills as they fall due? If not, it may be cash-flow insolvent. This includes debts that are due now and those that will become due in the near future.
The Balance-Sheet Test
Are the company's total liabilities greater than its total assets? If so, the company may be balance-sheet insolvent, even if it can still meet day-to-day payments.
Why It Matters
Directors of a UK limited company have a legal duty to act in the best interests of creditors once they know, or should know, the company is insolvent. Failure to act can lead to personal liability.
Common Warning Signs
- Regularly paying suppliers late
- Using new borrowing to repay old debts
- Receiving county court judgments (CCJs) or statutory demands
- Inability to agree HMRC payment plans
- Creditors threatening winding-up petitions
Next Steps
If any of these apply to your company, take the free assessment or speak with an advisor.
What is insolvency?
A company is insolvent if it cannot pay its debts when they are due, or if its liabilities are greater than its assets.
This definition applies to company insolvency in England and Wales.
When a company is considered insolvent
A company may be insolvent if:
- It cannot pay suppliers, HMRC, or creditors on time
- It has received a statutory demand or winding-up petition
- Its liabilities exceed its assets
What directors should do
If a company may be insolvent:
- Stop taking on new credit
- Avoid favouring certain creditors
- Seek advice from a licensed insolvency practitioner
Risks if ignored
Continuing to trade while insolvent can lead to:
- Personal liability
- Director disqualification
- Wrongful trading claims
Common questions
Does insolvency mean liquidation?
No. There are restructuring options such as administration or CVAs.
Related guidance
A company is insolvent if it cannot pay its debts.