Meaning
Statutory insolvency tests determine whether a company’s liabilities exceed its assets, valued at liquidation prices, unless a positive going-concern prognosis is established. Conducting an overindebtedness evaluation is a mandatory step for directors when there are signs of serious financial distress. This assessment determines whether the business must initiate a court-supervised restructuring or liquidation.
Balance Assessment
Financial experts perform this analysis by constructing a special balance sheet that revalues all assets and liabilities to reflect their current market worth rather than historical book values. In an overindebtedness evaluation, hidden reserves are mobilized and contingent liabilities are fully accounted for on the balance sheet. This process differs from standard accounting because it focuses on realistic liquidation outcomes.
If the resulting balance is negative, the company is overindebted.
Prognosis Influence
A positive going-concern prognosis can override a negative balance sheet outcome. Under the overindebtedness evaluation rules, if the business is highly likely to remain solvent for the next twelve months, insolvency filing is not required.
Insolvency Obligation
Directors must act quickly once the evaluation reveals uncompensated overindebtedness. Failure to file for insolvency within six weeks of establishing an overindebtedness evaluation outcome leads to severe personal liability for the board.
