‘Practical insolvency’ is the inability of a person or company to pay their debts as they fall due. Many businesses fall into this category: the term they (or you) would use to describe this situation is ‘cash flow problems’! A business in this situation would have to take, for example, one or more of the following actions:

• collect more of their debts
• cut costs
• reduce stock
• pay creditors instalments
• pay cash for new supplies
• see an insolvency practitioner
• secure lending on company assets
• increase/obtain overdraft
• lay-off staff/workers
• increase cash sales
• stop giving credit
• get a temporary/part-time job

A company that undertakes such a measure/s must ensure that they are fully committed to a plan of action: over a minimum period of time, to obtain a pre-determined objective that would ensure, not only the immediate survivability of the company, but the sound future financial footing required in today’s ‘lean and mean’ environment.

Reducing wages, or swapping the company sports car for a van, needs a resolve beyond many insolvent companies.

‘Absolute Insolvency’

‘Absolute insolvency’ is when a person or company has more liabilities (debts, creditors), than assets (cash, stock, and debtors) and the situation is unlikely to change.

Taking stock on credit, accepting money from customers for future work/orders, or ‘sticking your head in the sand’ in the knowledge of your company’s inability to pay its creditors in the short or long term (if proven) will result in the company’s directors having to make a contribution to the company’s creditors from their personal assets.