The Court of Appeal have recently considered* the Eurosail** test for insolvency and whether an appeal court can evaluate the facts afresh where an incorrect test for insolvency has been applied by a lower court.
The court’s ruling is to be welcomed for several reasons…
The court confirmed that if a lower court has applied an incorrect test for solvency, on appeal a judge is able to apply the correct test and not refer the case back to the lower court for another hearing. This approach avoids the inevitable cost consequences of additional hearings.
It was again confirmed that the cash-flow and the balance sheet test for insolvency stand alongside one another and the two tests form part of one exercise.
It is not enough to conclude that a company is solvent merely because it passes the cash-flow test, both tests must be applied before solvency is shown.
When applying the cash-flow test the court will look to the reasonably near future as well as the present, once the court has to look further into the future the balance sheet test is applied. If it is concluded by the court that a company cannot meet its future liabilities it will be insolvent, even if it is currently able to pay its debts as they fall due.
This makes it clear that even if a company is not cash-flow insolvent, the balance sheet test affords an alternative means of proving an insolvency for practitioners, which should give practitioners further comfort when bringing proceedings within an insolvency.
The court looked at the commercial reality of the company in this case – considering its trading history and its creditors. Practitioners will need to understand the ins and outs of a company’s business to come to a view on insolvency when considering potential claims.
*Carman (Liquidator of Casa Estates (UK) Ltd) v Bucci  EWCA Civ 383
**BNY Corporate Trustee Services Ltd v Eurosail-UK-2007-3BL plc  UKSC 28