Insolvency is the situation of financial hardship that occurs when a person company is not able to pay its dues. Insolvency for a business can be caused by a variety of situations that can result in low cash flow. In the event of insolvency either a person or business can approach creditors directly and arrange debts to settle them.
|| Ruchika Bhagat Chartered Accountant
What can you do to determine when your company is insolvent?
A business is considered insolvent if it's unable to pay its creditors. This could mean that it is unable to pay its bills on time or when they are due.
It could also be described in a position where there are more liabilities than assets in its balance account.
There are three tests you could run to determine if the company is insolvent.
The test of cash flow
In general, poor cash flow is one of the primary indicators of a failing business. It could be caused by an economic downturn, inadequate processes for controlling credit, as well as the demise of a customer or two. A lack of cash flow will impact the day-today operation of your business , making it hard to expand.
Test: Can you afford to pay off debts that are due to be paid now or will be due in the relatively not too distant in the near future?
If you're constantly paying your bills long after they're due and there's no indication of any changes coming anytime in the near future, your business could be insolvent.
The test of the balance sheet
A balance sheet is an overview of the company's capital, assets, and liabilities at the time of. It is essential that the value of your assets is correct and that all your contingent liabilities (a possibility of loss that might happen in the future) are considered.
A test to determine: Do your company's liabilities outweigh their assets i.e. is it owing more than its assets?
If the company's debts exceed the assets it has, you will not be able to pay your creditors, even if you had to sell the entire assets of the company. This implies that the company is insolvent. If the worth of its assets as well as liabilities are similar, then the company is on edge of bankruptcy.
The test of legal action
If you owe creditors more than PS750 in total, they may seek legal recourse to recover the amount owed. At first, it will be in the form either an statutory demand or county court judgment (CCJ) which is issued against the company. If the debt is not paid and the creditor is unable to pay, they can issue a winding-up request to shut down your business.
Test: Has any legal actions been taken against the business that is still unfinished?
If you have an unpaid legal demand or County court judgement filed against your company that hasn't been paid, the company is considered insolvent. This applies regardless of whether the debt is disputable.
What can happen when a business is insolvent?
An insolvent company is at risk of being taken over by the government.
However, directors of the company might be able make a decision that permits the company to trade or an organization may be able to, after having wiped out all of its liabilities, with an extraordinary resolution or by the approval of seventy five percent members in relation to the capital stock that is paid up, file an application according to the procedure to the Registrar to remove the name of the business from the company's register and the Registrar after receiving the application be able to remove the company's names out of its Register of Companies.
Pre-requisites/conditions for applying for Striking off name of Company:
- Elimination of all assets and obligations that belong to the Company.
- Approval of shareholders to apply to strike off the Company via a Special Resolution adopted at a properly convoked General Meeting or by obtaining the approval from 75% of shareholders on the basis of payed-up share capital.
- Accounting Statements (Form AOC-4/Form. AOC-4 XBRL) and the Annual Tax Return (Form MGT-7) are required to be filed prior until the close of the fiscal year which the business ceases to conduct its business
- There should not be any litigations pending against the Company
- The Company cannot receive a notice from the Registrar in accordance with section 1 of Section 248.
Procedure to apply for Strike Off from the Company under Section 248 of the Companies Act.
Call a Board meeting to approve closing of Bank Account, pay off all outstanding obligations, and to make the most recent financial statements of the Company following closure of Bank account, and to hold an Extra General Meeting Ordinary of the members.
Notice of EGM at least 21 days prior to the EGM or seek the consent of at least 90% of shareholders with notice periods that is less than 21 calendar days.
Hold an EGM and adopt Special Resolution for approval of the strike-off of Company. Instead of passing a Special Resolution, consent of at least 75% of the capital holders who have paid their share is possible to obtain.
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