How does UK law define corporate insolvency?

UK insolvency law defines corporate insolvency using two key legal tests: the cashflow test and the balance sheet test. Under the cashflow test, a company is insolvent if it cannot pay its debts as they fall due. For example, if a business consistently fails to meet obligations such as supplier invoices, HMRC tax liabilities, or loan repayments, it may be deemed insolvent even if its balance sheet appears positive. The balance sheet test looks at whether total liabilities exceed total assets, meaning the company’s financial position is technically negative. This situation may arise where a company holds significant long-term debts that outweigh the value of its property, stock, or receivables. Insolvency can also be determined if creditors have obtained judgments that remain unpaid. Recognizing insolvency early is vital because directors have a legal duty to act in creditors’ best interests once insolvency is likely. Ignoring these definitions can expose directors to personal liability claims and wrongful trading allegations. Taking early advice from insolvency practitioners ensures compliance and keeps options open.