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Insolvency (corporate)
Practical Law UK Glossary 9-385-5821 (Approx. 3 pages)
Glossary
Insolvency (corporate)
A company is insolvent if it has insufficient assets to discharge its debts and liabilities. There are different tests to determine insolvency, depending on the context in which the expression is used.
Section 123 of the Insolvency Act 1986 provides that a company is deemed "unable to pay its debts" where:
- The company has not paid, secured or compounded a claim for a sum due to a creditor exceeding £750 within three weeks of having been served with a written demand in the statutory form (known as a statutory demand).
- A creditor has attempted execution or another enforcement process against the company in respect of a debt without success.
- It is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due (commonly referred to as the cash flow test).
- It is proven to the satisfaction of the court that the value of the company's assets is less than its liabilities, taking into account contingent and prospective liabilities (commonly referred to as the balance sheet test).
The inability to pay debts forms one of the grounds on which a court may order a company to be put into liquidation. A court must also be satisfied that a company is or is likely to become unable to pay its debts before ordering a company to be placed into administration. These are the two principal corporate insolvency processes in England and Wales.
For an introduction to corporate insolvency processes, see Practice note, Corporate insolvency: a guide.