- BNY Corporate Trustee Services v Eurosail UK [2011] EWCA Civ 227

- BNY Corporate Trustee Services v Eurosail & Ors [2013] UKSC 28

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The term "insolvency" is not defined in the Insolvency Act 1986. Rather, the term is based upon two tests which are applied to determine whether a debtor is "unable to pay its debts" within the meaning of section 123 Insolvency Act 1986.

Section 123 Insolvency Act 1986 contains a definition of what it means for a company to be, or to be deemed by the court to be, unable to pay its debts as they fall due.

It follows from this that what is contained in section 123 Insolvency Act 1986 is what a person would have to prove to the court's satisfaction to show that a company is unable to pay its debts. Being able to show that a company is unable to pay its debts is very important, as it is a trigger, which makes it highly relevant in a range of contexts.

For example: - the court can wind up a company (that means it can initiate an involuntary liquidation) if the debtor company is unable to pay its debts; and - certain statutory provisions concerning voidable transactions (that is, including certain transactions known as preferences and transactions at an undervalue) can only bite where the transaction in question took place within a specified time frame and also, where at the time of the transactions, the debtor company is, or has as a result of the transaction, become, unable to pay its debts.

So, the two tests which are applied to demonstrate that a company cannot pay its debts as they fall due are called the cash-flow test and the balance sheet test.

At section 123(2) Insolvency Act 1986 the balance sheet test is set out. This subsection states that "A company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of a company's assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities."

The other test for insolvency, the cash-flow test, is referred to at section 123(1)(e) Insolvency Act 1986, where it states: "A company is unable to pay its debts.... if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.