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According to the Law an enterprise is said to be insolvent when it is unable to pay its debts
Any of these three tests may be applied to determine insolvency
a creditor has issued a statutory demand for a debt exceeding £750 and which is not paid within three weeks from the date of issue
failure to comply with a court order to pay a debt
- that liabilities are greater than the assets
There are three forms of liquidation or winding up, an enterprise
Members' Voluntary - where the shareholders (Owners) of an enterprise decide to close the business whilst it is still solvent and is able to pay off all of its debts
Creditor's Voluntary - where the shareholders Owners) of an enterprise decide to close a business where there is insufficient assets to pay its creditors that is, it is insolvent
Compulsory - a Court makes an Winding Up Order following a petition from an appropriate organisation or person
The owners and directors are held responsible for the situation and can be made liable to recompense creditors from their own personal finances
Keeping a strict eye on the Balance Sheet to determine if the status is changing towards a negative nett assets (that is the difference between the assets and the liabilities). Although there will be long term and contingent liabilities on the Balance Sheet they should not be ignored in the equation and take note that some of the assets cannot be turned back into cash easily, certainly not quickly and banks have a habit of calling in overdrafts and loans at short notice
Treat your liabilities as firm commitments to pay and base your cash flow forecast on making payments when they are due. This is a major management requirement and should be dealt with as early as possible - if you know you cannot pay within the time necessary then call the creditor (to whom you owe the money) quickly as possible. This will give your creditor some reasonable assurance that you will be making the payment(s), you can sleep better with the stress reduced by not having to deal with 'final demands' and possibly 'court orders'. But be sure that you will be able to pay when you promise - otherwise you will get no more help
Comments and suggestions for improving this site are appreciated and should be addressed to administration
Last Update 08-Jan-2012
Date first published 07-Nov-2005