What is the cashflow test for insolvency?

The cashflow test asks whether a company can meet its debts as they fall due. Even if a company has assets that exceed liabilities on paper, it may still be insolvent if it cannot generate cash quickly enough to pay creditors on time. For example, a company might own valuable property or stock but still fail to pay VAT, PAYE, or supplier invoices. Under UK law, consistent late payment or missed obligations indicates insolvency under the cashflow test. This test is especially relevant for businesses with seasonal income or long payment cycles, such as construction or retail. Insolvency practitioners use it to evaluate short-term liquidity, while courts may apply it when creditors petition for winding up. Directors should closely monitor cashflow forecasts and act if they cannot meet obligations. Failure to do so can trigger creditor action, enforcement measures, and potential director liability for wrongful trading.