Insolvent: Unable to Pay Debts

Insolvent unable to pay debts. There are two tests of insolvency. There is the balance sheet test and the cash flow test. These are set out in Section 123 of the Insolvency Act 1986.

Balance Sheet Test

The Balance Sheet Test of insolvency is whether or not your assets are exceeded by your liabilities. If your balance sheet is negative because the assets at book value are exceeded by the liabilities then you are insolvent.

Cash Flow Test

The Cash Flow Test of insolvency unable to pay debts, is whether you are able to pay your debts when they fall due but a momentary inability to do this will not be conclusive as to solvency. However if you are having difficulties paying your debts as they fall due you are at risk of being insolvent and should take advice to consider if Wrongful Trading has arisen. If you are unable to pay your debts when they fall due then you are insolvent.

The tests were put to scrutiny in the case of BNY Corporate Trustee Services Ltd & Ors v v Neuberger [2013] UKSC 28 which referred to the following at paragraph 42:

    1. Toulson LJ agreed with Lord Neuberger MR but expressed himself in a more guarded way. He agreed that Professor Sir Roy Goode had “rightly discerned the underlying policy” (para 115) but added (para 119) that Professor Goode’s reference to a company having “reached the point of no return because of an incurable deficiency in its assets” illuminates the purpose of the subsection but does not purport to be a paraphrase of it. He continued:

“Essentially, section 123(2) requires the court to make a judgment whether it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish.”