During difficult economic conditions it is important that all directors revisit their duties as directors and are aware of how the board should deal with the situation where a company is in financial difficulty and may be insolvent.
What is insolvency?
A company is deemed to be insolvent when it cannot pay its debts as and when they fall due.
The test sounds simple however its application involves a range of accounting and legal issues. When determining a company’s solvency a Court will consider the overall financial circumstances as a matter of commercial reality. Particular emphasis will be placed on a cash flow test, however, there are also a range of balance sheet factors including the ability to realise the value of assets and raise further funds, be it equity or debt.