Cashflow and balance sheet tests for insolvency
Produced in partnership with South Square
Cashflow and balance sheet tests for insolvency

The following Restructuring & Insolvency guidance note Produced in partnership with South Square provides comprehensive and up to date legal information covering:

  • Cashflow and balance sheet tests for insolvency
  • Introduction
  • The two tests
  • Cashflow insolvency
  • Balance sheet insolvency
  • Application in practice

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 Supreme Court decision 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, taking into account its contingent and prospective liabilities (so-called 'balance sheet insolvency').

Cashflow insolvency

The test in relation to cashflow insolvency was considered in the case of Re Cheyne Finance.

In that case, 'insolvency event' in a document was defined by reference to the cashflow or 'commercial' definition of insolvency in IA 1986,