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What is Company Insolvency Meaning?

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company insolvency meaning is when a business’s debts exceed the value of its assets (cash and non-cash). There are two tests to check whether a company is insolvent: the balance sheet test, where you list all the company’s debts then weigh this up against its contingent liabilities; or the cash flow test where you calculate the amount of money the company has coming in and going out. If the company is unable to cover its debts, it’s insolvent.

There are many reasons a company may become insolvent, from rising vendor costs to legal issues which reduce income. In some cases, the directors can save their company from insolvency by opting for a rescue mechanism like a Company Voluntary Agreement (CVA) or administration. These involve negotiating reduced payments to creditors whilst rearranging debt and making business changes to improve cash flow. A licensed Insolvency Practitioner is required to formalize and supervise these processes.

Exploring the Nuances of Company Insolvency: Insights and Analysis

Once a company is insolvent, the directors’ fiduciary duty shifts to put the interests of outstanding creditors above their own shareholders’. This means they must not continue trading when it is clear that they will not be able to pay their debts or make any profit. It also means that they must not take out more debt or dispose of any assets for less than their true value.

If the company’s financial situation cannot be saved, the directors can place it into liquidation (also known as winding-up). This involves selling off all the assets of the company to pay its debts with any remaining funds being distributed to creditors. When a company is placed into liquidation, its employees’ historic rights will be transferred to the new owner of the business under the Transfer of Undertakings and Protection of Earnings Regulations.

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