Balance sheet insolvency

“Unable to pay its debts” features in many definitions of insolvency or bankruptcy, and compared with the carefully crafted prose of other limbs, seems a dangerously vague expression. It has a pretty technical meaning — conferred by statute, no less — when you dig into it, and the English courts have had an opportunity consider what this means, and have resourcefully concluded “what it says”.

Section 123(2) of the Insolvency Act 1986 provides that a company will be deemed unable to pay its debts “if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”.

In BNY Corporate Trustees v Eurosail the Supreme Court concluded that this section means

A company which falls within section 123(2) is often said to be 'balance sheet insolvent' but that test can’t be satisfied on the basis of the company's statutory balance sheet (because it may omit important information such as some contingent liabilities.)

Brexit means Brexit

That the company has “reached the point of no return because of an incurable deficiency of assets”, (as hypothesised by the lower court in this case) wasn’t the right test either. The court must be satisfied, on the balance of probabilities, that the company has insufficient assets to be able to meet all its liabilities including prospective and contingent liabilities (I know what you’re thinking by the way — the highest court in the land isn’t adding a whole lot of value at this point is it?) discounted for contingencies and deferment. whether that is satisfied depends on the particular circumstances, and the burden of proof will be on the party asserting insolvency.

See also

• insolvency
• bankruptcy
• cashflow insolvency
• Bankruptcy - the ISDA Master Agreement definition.