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“Balance sheet insolvency test” questioned by Supreme Court 14 May 2013

The UK Supreme Court has delivered a significant ruling on the issue of balance sheet insolvency tests within insolvency court cases.

The ruling upheld a decision by the Court of Appeal (March 2011) in BNY Corporate Trustee Services v Eurosail UK that the existence of a deficit between assets and liabilities was not in itself sufficient reason to declare a firm insolvent.

Oliver Glynn-Jones, finance dispute resolution partner at BLP LLP, representing Eurosail in the case, warns of the implications that the ruling may have on future insolvency cases.

He explains: “The Supreme Court’s judgment that a court must approach the question of balance sheet insolvency with caution and that the onus is on a petitioning party to demonstrate on the balance of probabilities that there will be insufficient assets to meet liabilities is likely to deter some parties from petitioning on this basis.”

As a result of the ruling, Eurosail was not deemed unable to pay its debts within the meaning of section 123(2) of the Insolvency Act 1986.

The Supreme Court also rejected the “no point of return” solvency test, adopted by Lord Neuberger in the Court of Appeal judgement – despite this expression having entered common usage.

Glynn-Jones said: “The Supreme Court has demonstrated the mix of factors and issues that must be weighed up when considering the concept of balance sheet insolvency.

“It is not just a question of taking a snapshot at a point in time and relying on that. The ramifications of the case for both securitisation parties and insolvency practitioners are significant.

“It is not enough to show that the balance sheet shows a deficit.”

 

 

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