A Brief Guide to Insolvency

A business is insolvent when it has more liabilities than assets (the balance sheet test) or cannot pay its debts when they fall due (the cash flow test). Once insolvent the director’s duty changes from acting in the company’s shareholders’ interests to acting in creditors’ interests. Various legal restrictions and potential recovery actions can apply after this point. If you are in business you can continue to trade as long as you take every step to minimise the loss to creditors.

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