Insolvency Services

There are two types of insolvency. A company insolvency and a personal insolvency.

Both have the same basis in that they cant pay their debts when they fall due and they do not have assets that can be realised to pay the debts.

Company Insolvency

This is governed by the Companies Act 1993.

The so called solvency test is made up of two tests or limbs.

(a) Cash Flow test: this test concentrates on future cash flows, not what has happened in the past. As a minimum, a director should estimate future cash flows in and out, by way of a cashflow forecast. The accuracy of the cashflow will depend on subsequent events that are not entirely in management’s control such as possible changes demand for the products and in supply chains.

(b) Balance Sheet test: this test is a net assets test. A director must define and value both assets and liabilities. In terms of assets this will be realisable value of those assets that will provide a future benefit to the business. The valuation of assets and liabilities is critical to this test. The Companies Act 1993 has a three-step process. Step 1 take the face value the figures for assets and liabilities as presented by the company’s most recent financial statement. Step 2 take a wider view to determine whether these figures should be adjusted (because of post balance date events or for any other reasons. Step 3 make any adjustments necessary relying on valuations or estimates that are reasonable in the circumstance.

Personal Insolvency

This is called bankruptcy and is governed by the Insolvency Act 2006.

Essentially the same or similar tests apply as in a company but it is a personal failure as opposed to a corporate entity.

(c) Cash Flow test: this test concentrates on future cash flows, not what has happened in the past. As a minimum, a person should estimate future cash flows in and out, by way of a cashflow forecast or budget. The accuracy of the cashflow will depend on subsequent events that are not entirely in a person’s control such as possible loss of a job or income.

(d) Balance Sheet test: this test is a net assets test. A person must value all of their assets and liabilities. In terms of assets this will be realisable value of those assets now. The valuation of assets and liabilities is critical to this test. The process is to list all the Assets and then work out what they can be realised by selling in a non-urgent timeframe. Next list all your liabilities (bills) and work out how much and when they have to be paid. The combination of the timely asset sales and when the bills have to be paid, helps determine whether you can pay your debts.