Insolvency method rejected by Lords

INSOLVENCY PRACTITIONERS could see corporate insolvencies decline as a recent Supreme Court ruling may deter creditors from pursuing struggling companies.

Earlier this week the court rejected a "mechanical" definition of balance sheet insolvency, the Financial Times reports

A company can enter into insolvency through an inability to repay debts, known as cash flow insolvency, or because assets on the balance sheet outweigh existing and future liabilities.

The Supreme Court ruling could deter creditors from using the latter method to push struggling businesses into insolvency after the Lords rejected its use in a recent case. They felt it should be seen as a last resort and not a technical reason to push businesses over the edge.

Lord Neuberger, sitting with Lord Toulson and Lord Wilson said the balance sheet test did not amount to "a wholly new, relatively mechanical asset-based basis for seeking to wind up a company".

Instead he said it could only be used for a company that had reached "the end of the road."

The case involved Eurosail bond holders who felt that Eurosail was balance sheet insolvent. The company owned bonds in UK mortages.