How to Find Out If a Company is Insolvent?

Before a company formal declares, or is declared insolvent, they will be operating in an insolvent state. Any credit extended to these companies is almost certain to turn into a bad debt. By having the correct company due diligence and credit risk procedures in place you can identify companies that are insolvent but still operating.Insolvency levels have sky rocketed in the post-pandemic years, due to a combination of the UK's poor financial recovery and an unprecedented succession of macroeconomic challenges placing a huge amount of pressure on businesses. 2023 saw the highest number of corporate insolvencies in 30 years, with 25,158 companies going insolvent, and 2024 is predicted to see higher numbers.

This article aims to explain what insolvency is, what the warning signs are and how to test if a company is insolvent. 

What Is Insolvency?

Insolvency is when a business cannot meet its financial obligations and repay its debts on time. Insolvency is not limited to repaying debts. A company can also be insolvent if its assets exceed its liabilities.

Directors of an insolvent company are required by law to declare insolvency rather than to try to trade their way out of the hole. This is because the moment a company becomes insolvent, its directors' legal obligation transfers to protecting the financial welfare of its creditors. 

Insolvency Warning Signs to Watch Out For

Identifying clients/prospects who may be operating in an insolvent state is a difficult task without the proper tools. Once you have these it is vital that you look out for the following insolvency warning signs. These could include:: 

• Having statutory demands, winding up petitions and/or county court judgements filed against them. These all indicate that a company is failing to fulfill its financial obligations and essentially forcing creditors into taking legal action in order to get their money back. Whether a company has a single one of these or all three, it speaks of serious financial difficulty.
• Increasing inability to pay off debt, or deterioration in service quality. Watch out for these companies as they are guilty of taking increasingly longer to meet their financial obligations.  
• Company directors hold a fixed charge over company assets. This means that they get paid first in the event of company insolvency and are ultimately protected. This speaks of a lack of faith in the company's ability to pay its debts from those who have the most visibility over its financial state.
• The business is suffering unsecured losses due to customer liquidation. Most trade creditors will receive less than 10% of the money they’re owed. Any further losses will be absorbed by the company as bad debt. A company that has suffered a bad debt is three times more likely to go insolvent in the ensuing twelve months than one who has not.
• Failure to file accounts, filing late or altering accounting period. This can reflect poor management practices or cash flow issues. The adjustment of accounting dates is usually done in an attempt to mask financial difficulties. 
• Poor liquidity can lead to a constant need to plug holes in cash flow. This is expensive, time consuming and often fatal for a business.   
• No cash reserves. Businesses of any size must have a reserve pot in order to protect themselves from low customer demand and challenging economic situations. 
• Tight profit margins. Businesses that are working with tight profit margins often have little room to maneuver when facing financial difficulties. These companies are exposed to sudden changes in the market. 

Ways to Find Insolvent Companies:

There are several ways to find insolvent companies, these include: 

• Companies house: They offer an online search facility where you can check the trading status of the company whether they have ceased trading, insolvent or dissolved. This only list companies that have declared insolvency, either themselves or via the courts, and does not show if an existing company is trading in an insolvent state.
• London Gazette: This is a free service allowing you to search and browse a register of corporate insolvency procedures and changes to registered office addresses and ownership. Simply entering a company’s registration number or trading name will present any notices posted about the company of interest. Again this only shows companies that have formally been declared insolvent.
• Company Credit Checks & Business Reports: There are many companies that offer company credit checks including Red Flag Alert. These help identify if a trading company is actually insolvent and, as such, is a credit risk.

You can also use these three tests for potential commercial insolvency, which are a mechanism for assessing whether a company can meet their liabilities:

1. Cash Flow Test: Tight cash flow is an effective sign of insolvency in the future. If a company cannot pay their debt obligations when they are due. The cash flow test also determines whether they can pay staff, suppliers and other bills, as well as the purchasing of stock and equipment. 
2. Balance Sheet Test: Determines whether a company’s assets are worth less than it’s liabilities. You should seek advice to do a balance sheet test. If a company’s liabilities are found to exceed its assets then the business would not be able to cover creditor repayment in the event of the business being sold. If the assets and liabilities appear as a similar figure, this means the company pose a insolvency risk although they have passed the test. 
3. Legal Action Test: A company could be insolvent if it has outstanding statutory demands for non-payment of debts or any unanswered court orders.

What Are The Penalties of Still Trading as an Insolvent Company?

In the event of a company becoming insolvent, the legal position of its directors’ changes. They must act in the best interests of the creditors as opposed to the shareholders, this essentially equates to limiting the losses of the creditors. If they continue to trade, when insolvent, they may become personally liable for any creditor losses that the company makes.

In the event of unnecessary creditor losses due to continuing to trade, the directors can be sued for wrongful trading, found personally liable for losses or become subject to director disqualification proceedings. In every instance of insolvency, the liquidator will conduct an investigation into the actions of the directors in the run up to and during the insolvency.

If your business is insolvent then you should contact a licensed insolvency practitioner as soon as possible. They will be able to advise what action to take to protect you and your business. Whilst often the best course of action is to declare insolvency, the business may still be salvageable via an administration.

What Should Your Business Do If Your Customer is Insolvent?

If you suspect a customer is insolvent it is most likely that you will be unable to recover your money, some best practices for this situation are: 

• Suspend all future credit
• Talk to your clients about your concerns and request proof of solvency
• Try to recover money owing
• Only continue to deal with the client with up front payment
• Issue a CCJ for money owing
• Submit a winding up petition - you are unlikely to recover your money via a Winding Up Petition  and it has an associated cost but this is done to protect the wider business community.

Check if a Company is Insolvent with Red Flag Alert

Red Flag Alert are the industry experts in assessing financial health and spotting the early warning signs of insolvency, so much so that we have a 92% accuracy rate in predicting insolvency (the UK's highest). Our credit reports are detailed but easy to understand, even if you have no specialist credit and risk training. With reports on every UK business and a host of innovative tools, we make doing safer and smarter business easy.

Learn more about our insolvency risk scoring solution or get a free trial to see how our score works.