Yes, you are insolvent if your liabilities exceed your assets. This means that you owe more money than you have available to pay.
Insolvency is a financial state that can lead to serious consequences, such as bankruptcy, liquidation or legal action from creditors.
It’s important to take action if you find yourself in this situation, as ignoring the problem can make things worse.
Seeking professional financial advice and exploring options such as debt restructuring or consolidation may help you regain control of your finances and avoid further complications
What Is Insolvency?
Section 123 of the Insolvency Act of 1986 defines solvency. If your debts are greater than your assets, you are insolvent. Insolvency on the balance sheet is what this is. If you are unable to make your debt payments when they are due, you are also insolvent. Insolvency due to cash flow is what this is.
According to Section 123 of the Insolvency Act 1986, you are insolvent if you are either cash flow insolvent or balance sheet insolvent.
If you are insolvent, you may want to think about if your actions could be considered Improper Trading, which can have substantial repercussions for a director of a limited liability business.
Am I Therefore Insolvent, as Under Section 123 of the Insolvency Act of 1986?
Section 123 of the Insolvency Act 1986 defines solvency as follows:
(1) A company is deemed unable to pay its debts—
(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or
(b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or
(c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or
(d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
(3) The money sum for the time being specified in subsection (1)(a) is subject to increase or reduction by order under section 416 in Part XV.
Frequently asked questions
If your liabilities exceed your assets, then you are insolvent. This means that you owe more money than you have available to pay. You can calculate your net worth by subtracting your total liabilities from your total assets. If the result is negative, then you are insolvent.
If you find yourself insolvent, it's important to take action as soon as possible. Seeking professional financial advice can help you explore options such as debt restructuring or consolidation to regain control of your finances. It's important to avoid ignoring the problem as this can lead to further complications, such as bankruptcy or legal action from creditors.
It's unlikely that you will be able to borrow money if you are insolvent. Lenders will typically check your credit score and financial standing before approving a loan, and being insolvent can greatly reduce your chances of being approved. Additionally, borrowing more money when you are already insolvent can further worsen your financial situation. How do I know if I'm insolvent?
What should I do if I'm insolvent?
Can I still borrow money if I'm insolvent?
Conclusion
Checking if you are insolvent requires calculating your net worth, which is the difference between your total assets and total liabilities. To do this, you need to list all of your assets, including cash, investments, and property, and their estimated value.
Then, list all of your liabilities, including outstanding loans, credit card balances, and other debts. Subtract your total liabilities from your total assets, and if the result is negative, then you are insolvent. It’s important to regularly check your net worth to ensure that you are not accumulating too much debt and to take action if you are insolvent.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.