Cashflow and balance sheet tests for insolvency


Published by a ½Û×ÓÊÓƵ Restructuring & Insolvency expert
Practice notes

Cashflow and balance sheet tests for insolvency


Published by a ½Û×ÓÊÓƵ Restructuring & Insolvency expert

Practice notes
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Introduction

This PrACTice Note will give a basic overview of the applicable tests for cashflow and Balance sheet insolvency under section 123 of the Insolvency Act 1986 (IA 1986), in particular in the light of the leading judgment on the subject given by the Supreme Court in BNY Corporate Trustee Services v Eurosail-UK 2007-3BL (the Eurosail decision).

The two tests

Under IA 1986, s 122(1)(f), a company may be wound up by the court if the company is unable to pay its debts (see Practice Note: Compulsory liquidation—issuing a petition).

Under IA 1986, s 123(1)(e), a company is deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due (so-called 'cashflow insolvency').

Under IA 1986, s 123(2), a company is also deemed to be unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities,

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Jurisdiction(s):
United Kingdom
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Key definition:
Balance sheet definition
What does Balance sheet mean?

An account showing the assets of a company and its liabilities. Since the requirement for the inclusion of pension fund values and liabilities has been imposed, balance sheets can give a very misleading portrait of a company's value.

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