To determine, if a company is insolvent or not, there are several tests set in sections 122-123 of the Insolvency Act:
1) Balance sheet test: the court is satisfied that the company's assets are less than its liabilities, including contingent and prospective liabilities
2) Cash-flow test: Court is satisfied that the company is unable to pay its debts as they fall due
3) Failing to pay, secure or compound a claim for a sum due to a creditor exceeding £750 within 3 weeks of having been served with a statutory demand
4) Execution or other process issued on a judgement, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part.
If you are a director of the company and you know that one of the above tests is satisfied, you may be committing a wrongful trading unless you have taken all reasonable steps to minimize the loss to the creditors. If you feel that your company is at risk of insolvency, in order to minimise the loss, you may consider approaching creditors to restructure the debt on more favourable terms or allow more time to pay or attempt to refinance through obtaining fresh investments.
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