Meaning of insolvency United Kingdom insolvency law

most insurance companies , banks insolvent if policy , account holders required payments @ once. instead, main test of insolvency whether company can pay debts fall due.

the meaning of insolvency matters type of legal rule. in general terms insolvency has, since earliest legislation, depended upon inability pay debts. concept embodied in insolvency act 1986 section 122(1)(f) states court may grant petition company wound-up if company unable pay debts . general phrase is, however, given particular definitions depending on rules insolvency relevant. first, cash flow test insolvency represented under section 123(1)(e) company insolvent if company unable pay debts fall due . main test used rules. guides court in granting winding-up order or appoints administrator. cash flow test guides court in declaring transactions company avoided on ground @ undervalue, unlawful preference or created floating charge insufficient consideration. cash flow test said based on commercial view of insolvency, opposed rigid legalistic view. in re cheyne finance plc, involving structured investment vehicle, briggs j held court take account debts become payable in near future, , perhaps further ahead, , whether paying debts likely. creditors may, however, find difficult prove in abstract company unable pay debts fall due. because of this, section 122(1)(a) contains specific test insolvency. if company owes undisputed debt creditor of more £750, creditor sends written demand, after 3 weeks sum not forthcoming, evidence company insolvent. in cornhill insurance plc v improvement services ltd small business owed money, debt undisputed, cornhill insurance. solicitors had repeatedly requested payment, none had come. presented winding petition in chancery court company. cornhill insurance s solicitors rushed injunction, arguing there no evidence @ multi-million business had financial difficulties. harman j refused continue injunction noting that, if insurance company had chosen not pay, creditor entitled choose present winding petition when debt undisputed on substantial grounds.

english law draws distinction between debt , relevant cash flow test of insolvency under section 123(1)(e), , liability , becomes relevant second balance sheet test of insolvency under section 123(2). debt sum due, , quantity monetary sum, ascertained drawing account. contrast liability need quantified, instance, claim breach of contract , unliquidated damages. balance sheet test asks whether value of company s assets less amount of liabilities, taking account contingent , prospective liabilities. this, whether total assets less liabilities, may taken account purpose of same rules cash flow test (a winding order, administration, , voidable transactions). test used purpose of wrongful trading rules, , director disqualification. these rules potentially impose liability upon directors response creditors being paid. makes balance sheet relevant, because if creditors in fact paid, rationale imposing liability on directors (assuming there no fraud) drops away. contingent , prospective liabilities refer liability of company arise when event takes place (e.g., defined contingency under surety contract) or liabilities may arise in future (e.g., probable claims tort victims). method computing assets , liabilities depends on accountancy practice. these practices may legitimately vary. however, law s general requirement accounting assets , liabilities must represent true , fair view of company s finances. final approach insolvency found under employment rights act 1996 section 183(3), gives employees claim unpaid wages national insurance fund. purpose of certainty of objectively observable event, these claims arise, company must have entered winding up, receiver or manager must appointed, or voluntary arrangement must have been approved. main reason employees have access national insurance fund bear significant risk wages not paid, given place in statutory priority queue.