Balance sheet insolvency: Difference between revisions

Being “[[unable to pay its debts|unable to pay ones debts]]” — also known as “[[balance sheet insolvency]]” — features in many definitions of [[insolvency]] or [[bankruptcy]], and compared with the carefully crafted prose of other limbs, seems a dangerously vague expression. But 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 liability|contingent]] and prospective liabilities''”.

In {{casenote|BNY Corporate Trustees|Eurosail}} the Supreme Court considered this provision, noting that while this test this is often called “[[balance sheet insolvency]]” it can’t be satisfied purely by reference to the company's statutory balance sheet, because that may omit important information like [[contingent liability|contingent liabilities]]. Nor does it mean that the company has “reached the point of no return because of an incurable deficiency of assets”, which was what the Court of Appeal in this case had hypothesised.