What is the difference between the cash-flow and balance-sheet tests?

The cash-flow test (section 123(1)(e)) is forward-looking and practical: can the company pay debts as they fall due, both now and in the reasonably near future. The balance-sheet test (section 123(2)) is a value comparison: are total liabilities greater than total assets when you include contingent and prospective obligations. A company can pass one test and fail the other. Either failure makes the company insolvent for the purposes of the Insolvency Act 1986.

What is wrongful trading?

Wrongful trading is the rule in section 214 of the Insolvency Act 1986 that makes a director personally liable to contribute to the company's assets if the company went into insolvent liquidation, the director knew (or ought to have known) before that point that insolvent liquidation was inevitable, and the director did not take every reasonable step to minimise loss to creditors. It is a civil claim brought by the liquidator. It is not a criminal offence (unlike fraudulent trading under section 213) and it does not require dishonesty.

When do directors' duties shift from shareholders to creditors?

The starting position is that directors owe duties to the company, which under section 172 of the Companies Act 2006 means promoting the success of the company for the benefit of its members (shareholders). When the company is insolvent or on the verge of insolvency, that duty is modified: the directors must consider, or act in, the interests of creditors. The Supreme Court confirmed in BTI v Sequana [2022] that the duty engages when the directors know or ought to know that the company is insolvent or its insolvency is probable.

Can a company still trade if it is insolvent?

Yes, but the directors must take care. Continuing to trade while insolvent is not automatically wrongful trading. Section 214 requires that insolvent liquidation be inevitable, which is a higher bar than mere insolvency. The defence in section 214(3) is that the directors took every reasonable step to minimise loss to creditors. In practice that means taking professional advice, holding regular board meetings to review the position, taking no new credit they cannot pay, and considering formal insolvency protection if the position is not recoverable.

What is the difference between insolvent and bankrupt?

Insolvency applies to companies; bankruptcy applies to individuals. A company that cannot pay its debts is insolvent and may end up in administration, liquidation, or a CVA. An individual who cannot pay their debts is bankrupt (technically, becomes the subject of a bankruptcy order) and goes through the bankruptcy procedure under Part IX of the Insolvency Act 1986. The two regimes are distinct and the words are not interchangeable in a UK legal context.

What does technically insolvent mean?

Technically insolvent usually means a company has failed the balance-sheet test (more liabilities than assets) but is still meeting its bills as they fall due. The company is legally insolvent under section 123(2) Insolvency Act 1986, but it is not yet in cash-flow trouble. This often happens to start-ups carrying accumulated losses, or to companies with large contingent liabilities (a lease, a guarantee). It still triggers the directors' duty to consider creditor interests, even where the company is functioning normally day-to-day.

Who decides that a company is insolvent?

Insolvency is a legal fact, not an opinion. The court decides it definitively on a winding-up petition. The directors are expected to assess it themselves on a continuing basis. A licensed insolvency practitioner can give a formal opinion, often as part of a section 100 declaration or in supporting documents for an administration appointment. A creditor with an undisputed debt of £750 or more who has served a statutory demand and not been paid within 21 days has prima facie evidence of cash-flow insolvency under section 123(1)(a).

Administrator.uk

When does a UK company become insolvent?

By the administrator.uk editorial teamLast reviewed 25 May 2026

A UK company is legally insolvent the moment it fails either of the two tests set out in section 123 of the Insolvency Act 1986: the cash-flow test (can it pay its debts as they fall due?) or the balance-sheet test (are its liabilities greater than its assets, including contingent and prospective liabilities?). Failing either is enough. From that point, the directors' legal duty shifts: they must consider, or act in, the interests of the company's creditors, not only its shareholders.

Below, the two tests in detail, the practical signals that a company has failed one, the duty shift confirmed by the Supreme Court in BTI v Sequana [2022], and the wrongful-trading rule under section 214 that determines when directors become personally liable for trading on past the point of no return.

In one minute

The statute. Section 123 Insolvency Act 1986 sets the test. Two limbs, either of which is enough.
Cash-flow test (s.123(1)(e)). Can the company pay its debts as they fall due, now and in the reasonably near future?
Balance-sheet test (s.123(2)). Are liabilities (including contingent and prospective) greater than assets?
Failing either is enough. A company can pass one and fail the other. Either failure makes it insolvent for the purposes of the Act.
The duty shift. When insolvent or its insolvency is probable, directors must consider creditor interests, not only shareholder interests (BTI v Sequana, Supreme Court, 2022).
Wrongful trading (s.214). Directors are personally liable to contribute to the company's assets if they continued trading past the point insolvent liquidation was inevitable, unless they took every reasonable step to minimise loss to creditors.
What to do. Take professional advice from a licensed insolvency practitioner. Hold and minute board meetings. Consider formal protection (moratorium, administration, CVA) if recovery is not realistic.

Test one

The cash-flow test, section 123(1)(e)

The cash-flow test asks whether the company is able to pay its debts as they fall due. It is set out in section 123(1)(e) of the Insolvency Act 1986 and is the most commonly cited limb of the two in practice.

The test is not limited to debts due right now. The Supreme Court in BNY Corporate Trustee Services v Eurosail-UK [2013] confirmed that the cash-flow test covers debts that will fall due in the "reasonably near future". How near is "reasonably near" depends on the nature of the business: a few weeks for a typical trading company, longer for one with long lead times or contracted forward obligations.

Section 123(1) also lists four older deeming provisions, any of which is treated as proof of cash-flow insolvency:

s.123(1)(a): a creditor owed more than £750 has served a statutory demand and not been paid or had it secured within three weeks;
s.123(1)(b): execution issued on a judgment debt is returned unsatisfied in whole or in part;
s.123(1)(c): the equivalent in Scotland, a charge for payment has expired without being paid;
s.123(1)(d): the equivalent in Northern Ireland.

A served and unpaid statutory demand for a debt over £750 is the standard creditor evidence of cash-flow insolvency. It is the route by which most winding-up petitions begin. A debtor company that cannot pay or otherwise resolve the demand within 21 days has, in effect, given the creditor the keys to a winding-up petition under section 122.

Test two

The balance-sheet test, section 123(2)

The balance-sheet test is a value comparison. A company is insolvent on this limb if the value of its assets is less than the amount of its liabilities, "taking into account its contingent and prospective liabilities". The wording matters: the test is not just current liabilities on a snapshot balance sheet. It includes obligations that have not yet crystallised.

A company can pass the cash-flow test and still fail the balance-sheet test. A common case is a long-lease tenant who has agreed to pay rent for ten more years, who has stable monthly income to cover each month's rent as it falls due, but who, on a present-value reckoning of the future rent obligation, has more liability than asset value. The Supreme Court has cautioned against mechanical application of this test, and emphasised that "the future" cannot be too speculative; but where the contingent or prospective liability is real and reasonably foreseeable, it counts.

The balance-sheet test is more often the relevant limb in disputes between sophisticated parties (debenture-holders, large counterparties) than in the everyday creditor's path to winding up. For the everyday creditor, the cash-flow test and the statutory-demand route are quicker and more decisive.

What changes

The directors' duty shifts on insolvency

In normal trading, a UK director's primary duty under section 172 of the Companies Act 2006 is to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (its shareholders). Section 172(3) adds a qualifier: the duty has effect subject to any enactment or rule of law requiring directors to consider or act in the interests of creditors of the company.

That qualifier is engaged the moment the company is insolvent, or its insolvency is probable. The Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25 confirmed three points:

the "creditor duty" is not a separate free-standing duty: it is a modification of the section 172 duty;
it is triggered when the directors know, or ought to know, that the company is insolvent or on the verge of insolvency, or that insolvent liquidation or administration is probable;
once triggered, the directors must consider the interests of the company's creditors and give them appropriate weight; as insolvency becomes more certain, the creditors' interests come to predominate.

In practice this means that decisions taken when the company is on the verge of insolvency (paying a dividend to shareholders, repaying a director's loan account, selling assets at undervalue, paying one creditor in preference to others) can be unwound by a later office-holder under the antecedent-transaction provisions of the Insolvency Act 1986 (sections 238 to 245) and can found a misfeasance claim against the directors under section 212.

The director's personal exposure

Wrongful trading, section 214 Insolvency Act 1986

Wrongful trading is the rule that turns commercial misjudgement, taken past the point of no return, into personal liability. It is set out in section 214 of the Insolvency Act 1986 and applies once the company has gone into insolvent liquidation. Three conditions must all be met:

the company has gone into insolvent liquidation (its assets are insufficient to pay its debts and the costs of winding up);
at some time before the start of liquidation, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation;
the director did not take "every step with a view to minimising the potential loss to the company's creditors" that they ought to have taken.

The standard expected is that of a reasonably diligent person with both the general knowledge, skill and experience reasonably expected of someone in the director's role and the actual knowledge, skill and experience that the particular director has. A director with formal finance training is held to a higher standard on financial questions than a director without.

The defence in section 214(3), that the director took every reasonable step to minimise loss to creditors, does not require the director to stop trading immediately on insolvency. It requires real, documented action: taking professional advice, holding minuted board meetings reviewing the position, not taking new credit that cannot be honoured, considering and putting in place formal insolvency protection if recovery is not realistic. The contemporaneous board minutes are usually the document on which a wrongful-trading claim turns.

Wrongful trading is a civil claim brought by the liquidator. It is distinct from fraudulent trading under section 213 (which requires intent to defraud and is a criminal offence under section 993 of the Companies Act 2006), and from director disqualification under the CDDA 1986 (which is a separate process). All three can arise from the same underlying conduct.

The early signals

What insolvency tends to look like on the public record

A company is rarely insolvent by surprise. The public record usually shows the run-up: a slow accumulation of signals that, on their own, are routine, but together describe a deteriorating position. None of the following individually proves insolvency, and many appear at perfectly solvent companies for ordinary reasons. The signal is the combination.

Late accounts. Annual accounts overdue past the statutory deadline. Companies House records the lateness and applies penalties (£150 to £1,500 for a private company, escalating with length of delay).
Late confirmation statement. The 14-day annual filing missed.
A flurry of new charges. Multiple MR01 filings registering security to new lenders or factors over a short window. Asset-based lending is often the last source of liquidity before formal insolvency.
Director resignations. A long-serving director leaves with no replacement. A board reshuffle alongside other signals.
County court judgments. Visible on third-party credit reports; not on Companies House but on Registry Trust's public CCJ register.
Winding-up petition advertised. Published in the Gazette under category 24 (corporate insolvency notices). A creditor with a statutory demand that went unpaid is now in court.
Notice of Intention to Appoint Administrators (NOI). Filed at court before the formal administration appointment. Often the last warning before the company enters administration.

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Frequently asked

Common questions about corporate insolvency

When does a UK company become insolvent?: A UK company is insolvent the moment it fails either the cash-flow test or the balance-sheet test set out in section 123 of the Insolvency Act 1986. The cash-flow test asks whether the company can pay its debts as they fall due. The balance-sheet test asks whether the value of its assets is less than the amount of its liabilities, including contingent and prospective liabilities. Failing either one is enough to make the company legally insolvent.
What is the difference between the cash-flow and balance-sheet tests?: The cash-flow test (section 123(1)(e)) is forward-looking and practical: can the company pay debts as they fall due, both now and in the reasonably near future. The balance-sheet test (section 123(2)) is a value comparison: are total liabilities greater than total assets when you include contingent and prospective obligations. A company can pass one test and fail the other. Either failure makes the company insolvent for the purposes of the Insolvency Act 1986.
What is wrongful trading?: Wrongful trading is the rule in section 214 of the Insolvency Act 1986 that makes a director personally liable to contribute to the company's assets if the company went into insolvent liquidation, the director knew (or ought to have known) before that point that insolvent liquidation was inevitable, and the director did not take every reasonable step to minimise loss to creditors. It is a civil claim brought by the liquidator. It is not a criminal offence (unlike fraudulent trading under section 213) and it does not require dishonesty.
When do directors' duties shift from shareholders to creditors?: The starting position is that directors owe duties to the company, which under section 172 of the Companies Act 2006 means promoting the success of the company for the benefit of its members (shareholders). When the company is insolvent or on the verge of insolvency, that duty is modified: the directors must consider, or act in, the interests of creditors. The Supreme Court confirmed in BTI v Sequana [2022] that the duty engages when the directors know or ought to know that the company is insolvent or its insolvency is probable.
Can a company still trade if it is insolvent?: Yes, but the directors must take care. Continuing to trade while insolvent is not automatically wrongful trading. Section 214 requires that insolvent liquidation be inevitable, which is a higher bar than mere insolvency. The defence in section 214(3) is that the directors took every reasonable step to minimise loss to creditors. In practice that means taking professional advice, holding regular board meetings to review the position, taking no new credit they cannot pay, and considering formal insolvency protection if the position is not recoverable.
What is the difference between insolvent and bankrupt?: Insolvency applies to companies; bankruptcy applies to individuals. A company that cannot pay its debts is insolvent and may end up in administration, liquidation, or a CVA. An individual who cannot pay their debts is bankrupt (technically, becomes the subject of a bankruptcy order) and goes through the bankruptcy procedure under Part IX of the Insolvency Act 1986. The two regimes are distinct and the words are not interchangeable in a UK legal context.
What does technically insolvent mean?: Technically insolvent usually means a company has failed the balance-sheet test (more liabilities than assets) but is still meeting its bills as they fall due. The company is legally insolvent under section 123(2) Insolvency Act 1986, but it is not yet in cash-flow trouble. This often happens to start-ups carrying accumulated losses, or to companies with large contingent liabilities (a lease, a guarantee). It still triggers the directors' duty to consider creditor interests, even where the company is functioning normally day-to-day.
Who decides that a company is insolvent?: Insolvency is a legal fact, not an opinion. The court decides it definitively on a winding-up petition. The directors are expected to assess it themselves on a continuing basis. A licensed insolvency practitioner can give a formal opinion, often as part of a section 100 declaration or in supporting documents for an administration appointment. A creditor with an undisputed debt of £750 or more who has served a statutory demand and not been paid within 21 days has prima facie evidence of cash-flow insolvency under section 123(1)(a).