The end of the balance sheet test for solvency?

Unless there is good reason shown to the contrary it was largely considered that Section 123(2) of the Insolvency Act 1986 was in effect a balance sheet test for solvency, being one of the two possible tests with the other being a liquidity test of whether you are able to discharge your debts as and when they fell due for payment. The case BNY Corporate Trustee Services Ltd v Eurosail [2011] EWCA Civ 227 has thrown a spanner into the works in which it was held that Section 123(2) of the Insolvency Act 1986 cannot necessarily be based on an accounting exercise such as where financial statements have been prepared in accordance with UK GAAP. The test can now involve a degree of judgment in assessing solvency in view of: ”section 123(2) does not amount to a wholly new, relatively mechanical ”assets-based”, basis for seeking to wind up a company”…”the section can only be relied on by a future or contingent creditor of a company which has reached ”the end of the road”, or in respect of which the shutters should be ”put up”, imprecise, judgement-based and fact-specific as such a test may be.” In my view this means that the dominant test for solvency now is one based on liquidity. The test available under Section 123(2) of the Insolvency Act 1986 can now be complex, judgmental and costly potentially incorporating a need for expert evidence.

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