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It is insolvent if the realisable value is lower than the total amount of liabilities.
Applying this test might seem straightforward – simply check the net assets figure on the latest balance sheet to make sure it is positive. However, it is more complicated than that.
For example, a balance sheet may appear solvent if it includes overvalued assets (typically debtors or work in progress (WIP) that is really irrecoverable) or undervalued liabilities (usually because they are unrecorded or insufficiently provided for). As a result there have been many cases brought to ascertain how the test should be applied.
[See ‘Work in Progress’.]
Bankruptcy is a formal, legal option with a statutorily defined process that can be taken by a debtor whose finances are out of control and who is seeking a personal insolvency solution.
Bankruptcy has a beginning (the Bankruptcy Order) and a finite end (discharge). One of the key advantages is that the debtor will only be Bankrupt for one year, (unless the discharge is suspended) and the creditors’ debts are written off at this point.
It can be commenced by the debtor, or a creditor or creditors (who are owed a minimum of £5,000). A debtor can make a Bankruptcy application in electronic form and deliver this to an adjudicator by electronic means, only on the grounds that the debtor is unable to pay their debts. This carries a fee of £130, paid to the adjudicator.
A creditor can apply by way of a petition. This can be filed by:
A tangible disadvantage of the Bankruptcy option for a ‘professional’ (for example, a lawyer) is that their career may be at risk. They cannot sit in either Houses of Parliament, be a Justice of the Peace or a member of a Local Authority.
