Understanding company insolvency

Company liquidation basically refers to the closure of a company. The organization’s operations and trading are halted, and its assets are sold and turned into cash.

There are various types of liquidation, depending on whether the company in question is solvent or insolvent. To determine whether a company insolvency, there are two testing methods. These are the balance sheet test and the cash flow test.

The cash flow test seeks to find out whether the company is able to pay its debts, and precisely when the debts are due. If the answer is no, the company is insolvent. The balance sheet test on the other hand seeks to find out if there are more assets than cash owed. If the answer is no, then the company is insolvent.

In case of company insolvency, no investment can be made, and no credit can be accessed. The company must then be closed.