Company solvency calculator

Company directors should be alert to their potential personal liabilities for the offence of wrongful trading. So how do you tell if your company might be trading wrongfully, and thereby exposing the directors to risk. Conducting a regular solvency check might be the answer.

Wrongful trading

If, at some time before the start of a company liquidation, the directors knew, or ought to have concluded, that there was no reasonable prospect that the company could avoid going into insolvent liquidation, they could find themselves liable to make up any losses incurred after that time.

There are essentially three tests to establish solvency. Failing any one of these tests is sufficient to indicate that the company might need to take some remedial action.

Balance sheet test. If your company’s balance sheet assets are less than its liabilities, the company is insolvent. Warning! Your balance sheet may appear to be solvent if it includes overvalued assets (typically debtors or WIP that is really irrecoverable) or undervalued liabilities (usually because they are unrecorded or insufficiently provided for). You can set out your company’s balance sheet figures and adjust them for over or under values using our Company Solvency Calculator.

Cash flow test. Can the company pay its debts as they fall due? For example, are you able to pay the company’s PAYE or VAT on time. Are you only meeting your suppliers’ credit terms? If not then the company may be insolvent.

Legal action test. If a creditor has obtained a county court judgment or issued a statutory demand for more than £750 and this is not satisfied within 21 days, the company may be classed as insolvent.

Our company solvency calculator allows you to set out the results of these tests in an easily readable format.

If you think the company may be heading for insolvency, you should advise the directors to act (and demonstrate that they have acted) to maximise creditors’ interests.

If the company fails any of the tests, then you need to act quickly. Consider ways to immediately introduce new funds to enable the business to meet its debts or return the balance sheet to solvency. In tough times, restructuring your costs and taking steps to release cash flow are essential.