Am I a Going Concern?

& What should I do?

What is an in solvent Business?

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

Cash-flow or Trading insolvency is when a person or company has enough assets to pay what is owed, but does not have the appropriate form of payment. For example, a person may own a large house and a valuable car, but not have enough liquid assets to pay a debt when it falls due. Cash-flow insolvency can usually be resolved by negotiation. For example, the bill collector may wait until the car is sold and the debtor agrees to pay a penalty.

Balance-sheet insolvency is when a person or company does not have enough assets to pay all of their debts. The person or company might enter bankruptcy, but not necessarily. Once a loss is accepted by all parties, negotiation is often able to resolve the situation without bankruptcy. A company that is balance-sheet insolvent may still have enough cash to pay its next bill on time. However, most laws will not let the company pay that bill unless it will directly help all their creditors. For example, an insolvent farmer may be allowed to hire people to help harvest the crop, because not harvesting and selling the crop would be even worse for his creditors.

What Does It Mean to Perform Insolvent Trading?

Insolvent trading means trading while your company is suffering insolvency. Specifically, this refers to incurring new debt while your company is insolvent. As a director of a company, one of your main director duties is for your company not to engage in this practice. A director engages in insolvent trading if the following conditions occur:

• The person is a director while the company is insolvent.
• That when the debt is incurred the company is insolvent or would become insolvent.
• There are reasonable grounds for suspecting that the company is insolvent, or will become insolvent as a result of the debt.

If a director engages in insolvent trading then they become personally liable for the new debts that are incurred by the company. That means they are not protected by limited liability. Therefore, the director’s personal assets are used to pay the new debt obligations. This is particularly relevant if your company goes into liquidation or bankruptcy, after being insolvent.

What are my responsibilities as a Director?

It is always advisable to see an Insolvency Practitioner if you have any concerns, to ensure that you have specific advice on your specific situation.   These Guidance Notes are not designed to be all encompassing, but rather a general guide.

Given that the company is below the threshold, it is the Directors responsibility to assess “going-concern” questions. 

Specifically, THE DIRECTORS RESPONSIBILITIES OR QUESTIONS TO ASK ARE: –

When conducting their going concern assessment, the directors will have to evaluate which of three potential conclusions is appropriate to the circumstances of the company:

1. there are no material uncertainties that may cast significant doubt about the company’s ability to continue as a going concern
2. there are material uncertainties related to events or conditions that may cast significant doubt about the company’s ability to continue as a going concern but the going concern basis remains appropriate
3. the use of the going concern is not appropriate

The accounting standards require directors to make disclosures about the existence and the nature of material uncertainties that lead to significant doubts about going concern.

Final Though

If you are struggling or you have questions always seek help.  Speak to your accountant, solicitor and Insolvency Practitioner and people who are close to you.