Balance Sheet Insolvency: The Point of No Return


The decision of the Court of Appeal in BNY Corporate Trustee Services Limited v Eurosail-UK 2007-3BL plc and others [2010] EWCA Civ 2007, is good news for distressed companies in need of some breathing space. In this case, the Court of Appeal held that the balance sheet test for insolvency is only intended to apply where a company has reached a “point of no return” rather than being used as a “mechanistic, even artificial, reason for permitting a creditor to present a petition to wind up a company”. The Court upheld the High Court?s earlier decision that Eurosail was not insolvent under s123(2) and provided a useful summary of how future and contingent liabilities should be evaluated for the purposes of assessing balance sheet insolvency.

Background to the insolvency test

The test for insolvency under English law is whether the debtor has an „inability to pay debts?. The tests for this are set out in the Insolvency Act 1986 (“IA”). Under section 123(2) a company is deemed unable to pay its debts if the value of the company?s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. This is the test for „balance sheet insolvency?. Under section 123(1)(e) of the IA a company is regarded as unable to pay its debts if it is unable to pay its debts as they fall due. This is the test for „cash flow insolvency?.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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