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“Is my business insolvent?”

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Q: “How do I know if my business is insolvent?”

A: There are two principal methods for determining whether or not a business is technically insolvent.

The first is to check if the business is able to meet its liabilities as and when they fall due. If you are having trouble paying your suppliers, your landlord, or the taxman on time this could mean that your business is insolvent.

The second method involves drawing-up a summary of the firm’s assets and liabilities as of today’s date. Where the total liabilities of the business exceed the total assets, that business is deemed to be insolvent.

It is possible to continue trading where the liabilities of a business exceed the assets, but this can only be done where you have very good reasons for believing that the situation is only temporary and will be reversed in the near future.

In order to support this, you will need to have solid projections for the next few months of your business. The projections should include clear details of exactly how you are going to generate the cash to pay the company’s liabilities and reverse the current position. These projections will have to be updated regularly to ensure that they are met as, if something goes wrong, you will need to seek advice immediately.

There are very serious consequences of continuing to trade when you know your business is insolvent, with the main risk being that you could become personally liable for the debts of the business, even if you trade through a limited company. You can be fined and could also be disqualified from holding office as a director for up to 15 years.

If you think your business may be insolvent, or you feel there is a risk it will become insolvent in the near future, you should speak to your accountant. If you have not yet reached the point of being technically insolvent, they should be able to suggest ideas and solutions to avoid it happening.

If the business is technically insolvent, they will be able to advise you on what to do next, how the process works with an insolvency practitioner, and give you an idea of the various options that you have.

Martin Dunne is a partner at Sayers Butterworth LLP. He previously worked in the entrepreneurial services division of Ernst & Young, and has over 15 years of experience working with fast-growing, entrepreneurial businesses. He provides practical and commercial advice to clients ranging from start-up stage to AIM-listers in a variety of sectors including retail, property, manufacturing, technology and media.

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