The Court of Appeal has confirmed the High Court's decision that the "Balance Sheet Test" (for whether a company is unable to pay its debts under Section 123(2) of the Insolvency Act 1986) cannot be reduced to a single formula or set of principles that apply to all companies.
The Balance Sheet Test forms part of the provisions that regulate when a company may be compulsorily wound up by the Court.
The decision in BNY Corporate Trustee Services Limited v Eurosail - UK 2007 - 3BL Plc and others states that a company should only fail the Balance Sheet Test if it has genuinely reached the point of no return. Essentially, the court should assess whether finding a company to be balance sheet insolvent is commercially fair to both the company's short and long-term creditors, and whether it reflects the commercial reality of the company's situation. The tipping point is therefore likely to be when allowing the company to continue to operate and pay its short-term liabilities is simply likely to reduce the overall pool of assets available to pay the company's future and contingent creditors.
The court also noted that, in this case, the company's most recent audited accounts formed a suitable starting point when applying the tests under Section 123(2). This would not always be appropriate, however, and the characteristic limitations of the company's accounts should be acknowledged.