What are the triggers to look out for in an insolvent company?

As Business Recovery experts (and as with accountants), in many cases it can be obvious that a company is struggling, and heading towards financial difficulty/ or even insolvency proceedings.  However, as a director looking through their business – often with rose-tinted glasses – emotions can play a large part.
Many directors will believe that they are going to be able to work through the difficulties and turn the business around, with a little help from this creditor, or a new credit facility. But what if they get this new line of credit, and it takes them further down…potentially creating more losses?
Within the industry, there are two tests for insolvency:

1. Cash flow test – when a business is unable to pay its debts as and when they fall due, regardless of its assets
2. Balance sheet test– when a business’s liabilities exceed its assets, (regardless of when debts fall due).

It’s openly debated that these two tests aren’t complete and distinct.  One is a short-term view of debt, and the other a long-term view on assets.  When applying these tests, legally speaking, a large number of SMEs could well have technically traded whilst insolvent. Before a business gets to this point, there is a pattern which can be identified, and potentially spotted by their advisers.  Of course, the earlier it is spotted, the more preventative options available to the company directors.

1. Not being able to pay creditors on time and/or in full

Whilst sometimes these financial difficulties are temporary, say a large debtor failed to pay, or losing a large customer, if a business is unable to pay its creditors it really needs to take action.  Whether that be re-negotiating terms with the creditors, or perhaps seeking funding from external sources.  Either way, the problem isn’t going to just go away and needs addressing.  Usually, clients will turn to their accountants for help.

2. Creditors have issued final demands for payment, or a statutory demand

Once a creditor has noticed (and often chased several times) for payment, if they haven’t already, they’re probably going to threaten to take further steps.  It’s very likely that if the bill isn’t settled, it could end up in court.
The above tends to lead to the issuing of a winding up petition and the potential of a compulsory liquidation.

3. Creditors have commenced legal action

Perhaps one of the most serious situations, a winding up petition may be issued, where the creditor petitions the court to close the business down if the debt is not repaid. It is very public, unpleasant, and is filed against your company permanently.
If you notice one of your clients starting to fall into the habits of the above, it may raise alerts that the business may be heading towards insolvency, or if not, may just require a funding injection to further assist the business and its working capital.