Insolvency
The state of being unable to pay debts, tested either on a cash-flow basis (debts due but unpaid) or a balance-sheet basis (liabilities exceeding assets). Defined for companies by section 123 of the Insolvency Act 1986.
Independent editorial summary — not the official statute text. Read the official version on legislation.gov.uk.
Section 123 of the Insolvency Act 1986, headed 'Definition of inability to pay debts', sets out both tests a court can use. The cash-flow test looks at whether debts are actually being paid as they become due: a company is deemed unable to pay its debts '(1)A company is deemed unable to pay its debts—' where, among other grounds, 'it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.'
The balance-sheet test is separate and can apply even where a company is currently meeting its bills. The Act provides that '(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.' Either test, on its own, is sufficient to establish insolvency for the purposes of the Act, which underpins the winding-up and other insolvency procedures available against a company.
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Official sources
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