Insolvency’s Two Tests

 

There are two tests of solvency. There is the balance sheet test and the cash flow test.

 

Balance Sheet Test

The Balance Sheet Test of solvency is whether or not your assets are exceeded by your liabilities. If your balance sheet is negative because the assets at book value are exceeded by the liabilities then you are insolvent.

 

Cash Flow Test

The Cash Flow Test of solvency is whether you are able to pay your debts when they fall due but a momentary inability to do this will not be conclusive as to solvency. However if you are having difficulties paying your debts as they fall due you are at risk of being insolvent and should take advice to consider if Wrongful Trading has arisen. If you are unable to pay your debts when they fall due then you are insolvent.