In BNY Corporate Trustee Services Limited v Eurosail–UK 2007–3BL Plc and others, the Court of Appeal ruled on the interpretation of the so-called "balance-sheet" test of insolvency under section 123(2) of the Insolvency Act 1986. This is essentially that a company is deemed unable to pay its debts if the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. This appears to be the first reported case on the interpretation of the balance-sheet test of insolvency.
The company had issued notes, in dollars and sterling, to fund the acquisition of a portfolio of UK mortgage loans, and had hedged its currency and interest rate exposures with Lehman companies. It was meeting its current liabilities but following the failure of the Lehman companies, there was uncertainty over its currency exposure.
The Court held that what was necessary was not a mechanical comparison of the value of the assets and liabilities in the last audited balance sheet. Other factors had to be taken into account. Contingent and prospective liabilities in particular had to be valued; the current deficit in net assets was relatively small and the length of time over which some of the liabilities would mature gave rise to a great deal of uncertainty, particularly with regard to the currency exposure.
The onus was on the noteholder alleging insolvency to show that the company had reached the point of no return. As the uncertainties were so great, it had failed to establish this.