Corporate Insolvency: Tests and Implications

by Martin on June 11, 2012

Applying the two primary tests should be straightforward, but in practice, it is not.  One of the main problems is how long an investigation into the organisation takes before a decision can be reached as to the viability of the organisation.  Close analysis of liabilities can bring about disputes which require evaluation and resolution before any further action is taken.  Because of this, there are two tests that can be applied at any time to indicate that an organisation is insolvent.  These are:

  • If an organisation receives a written demand in the appropriate format for a sum of more than £750 and does not settle the debt or make arrangements with the creditor to repay the sum in another way.
  • If a judgment is awarded against the organisation and it is returned either wholly or partially unsatisfied.

If either of these events occurs, the organisation is deemed insolvent.

Knowing these tests and being able to apply them provides a useful check for organisations, as not only do they provide the basis for a declaration of insolvency, they also form the grounds for a court to appoint administrators, and trigger specific provisions relating to debts within the Insolvency Act.

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