When is a company insolvent? The Insolvency Act 1986 attempts to answer this question by introducing the concept of a company’s inability to pay debts. Section 123 provides that a company will be deemed unable to pay its debts in six scenarios. Of these, the cash flow or commercial insolvency test in section 123(1)(e) – based on a company’s inability to pay its debts ‘as they fall due’ – has received less judicial attention than you might initially expect.
While it might sound simple to determine whether a company is unable to pay its debts as they fall due (either a company is paying its debts or it isn’t), on closer inspection the test reveals itself to be more difficult to apply in practice.
