What’s The Difference Between Insolvent and Solvent?

A company is solvent when it has enough assets to meet any debt obligations in the long-term. A business may have a temporary problem with liquidity, in other words the amount of cash they have available at any one time to pay a due bill, but their overall solvency is good or fair which means they can continue to trade. They can then continue to trade and return to solvency once the overdue debt has been settled.

Insolvency means that the company doesn’t have enough assets to cover their debts, either in short and long term. There are two main tests that show whether a business is insolvent or not:

Cash Flow:

The company is unable to meet its current or future debts and pay them as they fall due.

Balance Sheet:

The liabilities for the company outweigh the assets they have – in other words, selling these off will not pay their debts.

What Happens Next?

If a company becomes insolvent and creditors start to take legal action, there are several options for directors. They can undertake a company voluntary arrangement where they pay a certain amount to creditors to clear the debt by a specified time, the business can be taken into administrative receivership or administration where it’s running is handed over to receivers or administrators or they can opt to go into liquidation.

Signs that a company is facing insolvency can include regularly being unable to pay the bills, getting behind on tax payments and using overdraft facilities too much.

If you are facing potential insolvency, it pays to get the right advice as quickly as possible. Talking to an insolvency practitioner could well save your business.

Contact us today to see how we can help.

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