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This analysis looks at directors’ duties, particularly concerning wrongful trading, in the context of companies facing financial difficulties as a result of coronavirus (COVID-19).
Although there is no definition of ‘insolvent’ in the Insolvency Act 1986 (IA 1986), a company may be wound up by the court if the company is unable to pay its debts.
Under IA 1986, s 123(1)(e) a company is deemed to be unable to pay its debts 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 the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (so-called 'balance sheet insolvency').
Both tests require a consideration of the company’s present, prospective and contingent liabilities. However, while ‘cashflow insolvency’ is concerned with whether the company is likely to be able to meet its liabilities in the short to medium term, ‘balance sheet insolvency’ requires a longer-term view on whether the company has sufficient assets to have a reasonable expectation of meeting its liabilities.
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