How to Find Out If a Company is Insolvent?

Mark Halstead Risk

Insolvency risk has the ability to affect businesses in a variety of ways. Post-pandemic we’re seeing the temporary bans on insolvencies being lifted in the UK. As a pandemic measure, there was a suspension of serving statutory demand put in place by the UK government to prevent insolvencies. Post-pandemic we’re seeing these temporary bans on insolvencies being phased out due to the pandemic now nearing its end and as the Government rolled out its plan for ‘living with covid’. Presently, we are seeing the number of insolvencies rapidly rise, making it all the more important that your business understands the financial health of the businesses you deal with. This way they will be able to analyse how they pose a risk to your company’s financial situation. 

This article aims to explain what insolvency is, what the warning signs are and how to test if a company is insolvent. 

What Is Insolvency?

Insolvency is when a business cannot meet its financial obligations and repay debt on time. Insolvency is not limited to repaying debts. A company can also be insolvent if its assets exceed its liabilities. Understanding these differences are vital if you are to spot insolvency warning signs. 

Insolvency Warning Signs to Watch Out For

Identifying clients who are at risk of insolvency is a difficult and tedious task. Despite this, it is vital to monitor your clients for insolvency warning signs. These could include:: 

  • Having statutory demands, winding up petitions and/or county court judgements filed against them. These all indicate that a company is failing to fulfill its financial obligations and essentially forcing creditors into taking legal action in order to get their money back. 
  • Increasing inability to pay off debt, or deterioration in service quality. Watch out for these companies as they are guilty of taking increasingly longer to meet their financial obligations.  
  • Company directors hold a fixed charge over company assets. This means that they get paid first in the event of company insolvency and are ultimately protected.  
  • The business is suffering unsecured losses due to customer liquidation. Most trade creditors will receive less than 10% of the money they’re owed. Any further losses will be absorbed by the company as bad debt.
  • Failure to file accounts, filing late or altering accounting period. This can reflect poor management practices or cash flow issues. The adjustment of accounting dates is usually done in an attempt to mask financial difficulties. 
  • Poor liquidity can lead to a constant need to plug holes in cash flow. This is expensive, time consuming and often fatal for a business.   
  • No cash reserves. Businesses of any size must have a reserve pot in order to protect themselves from low customer demand and challenging economic situations. 
  • Tight profit margins. Businesses that are working with tight profit margins often have little room to maneuver when facing financial difficulties. These companies are exposed to sudden changes in the market. 

Ways to Find Insolvent Companies:

There are several ways to find insolvent companies, these include: 

  • Companies house: They offer an online search facility where you can check the trading status of the company whether they have ceased trading, insolvent or dissolved.
  • London Gazette: This is a free service allowing you to search and browse a register of corporate insolvency procedures and changes to registered office addresses and ownership. Simply entering a company’s registration number or trading name will present any notices posted about the company of interest.
  • Company Credit Checks: There are many companies that offer company credit checks including Red Flag Alert.

You can also use these three tests for potential commercial insolvency, which are a mechanism for assessing whether a company can meet their liabilities:

  1. Cash Flow Test: Tight cash flow is an effective sign of insolvency in the future. If a company cannot pay their debt obligations when they are due. The cash flow test also determines whether they can pay staff, suppliers and other bills, as well as the purchasing of stock and equipment. 
  2. Balance Sheet Test: Determines whether a company’s assets are worth less than it’s liabilities. You should seek advice to do a balance sheet test. If a company’s liabilities are found to exceed its assets then the business would not be able to cover creditor repayment in the event of the business being sold. If the assets and liabilities appear as a similar figure, this means the company pose a insolvency risk although they have passed the test. 
  3. Legal Action Test: A company could be insolvent if it has outstanding statutory demands for non-payment of debts or any unanswered court orders.

What Are The Penalties of Still Trading as an Insolvent Company?

In the event of a company becoming insolvent, the legal position of its directors’ changes. They must act in the best interests of the creditors as opposed to the shareholders. If they continue to trade, when insolvent, they will become personally liable for any creditor losses that the company makes. In the event of creditor losses, the directors can be sued for wrongful trading or become subject to director disqualification proceedings. If your business is insolvent then you should contact a licensed insolvency practitioner as soon as possible. They will be able to advise what action to take to protect you and your business. 

What Should Your Business Do If Your Customer is Insolvent?

Dealing with an insolvent customer is risky but there are ways to mitigate this, including: 

  • Proposing a repayment plan ensures you receive remuneration within a reasonable time frame without putting pressure on the customer. 
  • Issuing late fees will encourage the insolvent customer to pay debts in a punctual manner. However, it puts additional pressure on their finances. 
  • Suspending services: This will alleviate the financial effects on your business and stops the insolvent customer from racking up greater debts with you.
  • Tightening your credit terms will set a standard for your company and reduce the risk of dealing with insolvent customers in the future. 

Check if a Company is Insolvent with Red Flag Alert

Red Flag Alert utilises a variety of sources for our scoring system to give you a comprehensive analysis of a company. We won’t just show you the list of insolvent companies but also those who are at high risk of insolvency. Red Flag Alert is designed to protect your business against a multitude of risks. Learn more about our insolvency risk scoring solution or book a demo to see how our score works.

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Mark Halstead Partner

Mark's experience is big data analytics, financial services and building businesses provides Red Flag Alert with strategic direction.