The UK Supreme Court recently considered the scope of the following tests for whether a company is unable to pay its debts (as set out in section 123(2) of the Insolvency Act 1986):
- The company is unable to pay its debts as they fall due (the "cash-flow test") and
- The value of a company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (the "balance-sheet test").
The Supreme Court confirmed that:
- The cash-flow test is concerned with debts presently falling due as well as those falling due in the reasonably near future. What constitutes the "reasonably near future" will depend on all the circumstances including, in particular, the nature of the company's business.
- Once the court has to consider more than the reasonably near future, the cash-flow test becomes entirely speculative and the balance-sheet test becomes the only sensible test for insolvency.
- The balance sheet test is a legal test that requires the court to determine what value to attribute to the prospective and contingent liabilities of a company. The court must compare present assets with present and future liabilities and, making allowance for contingencies and deferred payments, assess whether the company can be reasonably expected to meet all of its liabilities.
- Characterisation of the company having reached "the point of no return because of incurable deficiency in its assets" is not the correct test for balance-sheet insolvency and should not pass into common usage.
See court decision here.