| Insolvency
is the body of law concerned with the ability to pay debts. Distinguish
between the following:
The insolvency of a company, an individual and a partnership
Formal insolvency and informal insolvency.
Companies
There
are two alternative statutory tests:
The cash flow test
‘a
company is deemed 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’.I.A. s. 123(1)(e)
The
balance sheet test
‘a
company is also unable to pay its debts if it is proved to the
satisfaction of the court that the value of the company’s
assets is less than the amount of its liabilities, taking into
account it contingent and prospective liabilities’I.A. s.123(2).
Failure
on either test is informal insolvency.
So
a company can be insolvent even if its assets exceed its liabilities,
where it cannot pay its debts as they fall due. A company may,
however, be able to trade out of this position and thus avoid
formal insolvency.
A
creditor can prove insolvency by serving a statutory demand at
the registered office of the company. If payment is not received
within 21 days and the debt cannot be disputed on bona fide and
substantial grounds, then the debtor is deemed by law to be insolvent:
I.A. s.123(1)(a).
Individuals
An
individual is insolvent where:
The individual owes a debt for a liquidated sum payable immediately
or at some certain, future time; and
It is debt which the individual appears either to be unable to
pay or to have no reasonable prospect of being able to pay. I.A.
s267
Inability
to pay can be proved either:
After service of a statutory demand (the forms of demand for companies
and individuals are different); or
Where
execution has been levied on a judgment and returned unsatisfied:
I.A. s.268
Partnerships
A
partnership can be wound up as an unregistered company on the
ground that the partnership is unable to pay its debt. I.A. s221(5);
IPO, Article 8. It can also go into administration or a voluntary
arrangement.
The individual partners may be made bankrupt or agree an Individual
Voluntary Arrangement with the creditors (an IVA).
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