In BNY Corporate Trustee Service v Eurosail UK1, the Court of Appeal rejected a “mechanical” definition of balance sheet insolvency.
Under statute (section 123(2) of the Insolvency Act 1986) a company may be insolvent if it fails the ‘balance sheet test’, whereby its current assets are outweighed by its existing and future liabilities. As opposed to being a “wholly new relatively mechanical assets based” basis for seeking to wind up a company, the court held that section 123(2) applies when it can be considered that a company has “reached the point of no return” or the point at which “the shutters should be put up”. The Court of Appeal accepted that this is a less straightforward test to apply. There has been commentary suggesting that this ruling may deter creditors from using the balance sheet route to push struggling companies into collapse.