What´s Insolvency Law? Essay

2987 Words 12 Pages
Insolvency law does not exist in a vacuum and the rules of insolvency may influence the behavior of a debtor or stakeholder in the ordinary course of business. Interestingly, English law has no definition of ‘insolvency’ though, rather, various tests of one’s ‘inability to pay debts’ and it therefore falls upon the Courts to decide the issue of solvency. Indeed a clear definition of “inability to pay debts” has been termed ‘fundamental’ to any system of insolvency law. The Insolvency Act 1986 (the ‘Act’) deems a company to be unable to pay its debts following the satisfaction of any one of a number of tests, the most important of which are cash-flow and balance-sheet insolvency tests. The Eurosail case is thus pivotal as it involved the …show more content…
The essay then discusses whether the Supreme Court has provided greater clarity for the future as compared to the Court of Appeal decision and makes suggestions on the way forward.
Background
A company can be wound up under the Act if it is unable to pay its debts. Sections 123 (1) and (2) of the Act provide as follows:
'(1) A company is deemed unable to pay its debts—(a) [non-compliance with a statutory demand for a debt exceeding £750 presently due] (b) to (d) [unsatisfied execution on judgment debt in terms appropriate to England and Wales, Scotland and Northern Ireland respectively] (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) A company is also 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.'

Section 123 (1) (e) of the Act is referred to as the cash flow test while s. 123 (2) is the ‘balance sheet test’ . The essential difference between the two tests is the focus of the former on liabilities (including contingent and prospective liabilities) as opposed to the focus on debts for the latter. Liabilities are a much

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