A company is only deemed to be insolvent if it cannot afford to pay what is owed to its creditors; evidence of which can be provided via two different tests. The cash-flow forecast test will ascertain whether or not a business will fail to pay its debts as they are due. The balance sheet test will determine whether or not the monetary value of a company’s assets amounts to lower than the total value of its liabilities.
If the response to any of these questions is ‘yes’ then a company may be considered insolvent under UK law. In addition to this, a company is also deemed insolvent if a creditor serves a formal payment demand that is ignored for longer than three weeks (the amount owed must be over £750) or if a court order has not yet been fulfilled.