What is Balance Sheet Insolvency? Is there a test for it?

Published on : 28th October, 2025

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Directors Duties in Insolvency and their Implications

What is Balance Sheet Insolvency?
How to Apply the Balance Sheet Test for Insolvency
Balance Sheet vs. Cashflow Insolvency
Implications and Your Directors’ Duties
What should I do next?

What is Balance Sheet Insolvency?

Balance Sheet Insolvency Defined

It means the company owes more money than it owns, making it impossible to pay off its debts in full if all assets were immediately sold.
A company might still be able to pay its liabilities when they are due (meaning it is cashflow solvent), but this condition signals long-term insolvency.
A company may also be deemed balance sheet insolvent if contingent liabilities exceed its assets.
The definition was determined in the key UK legal case of (BNY Corporate Trustee Services Ltd & Ors v Neuberger [2013] UKSC 28).

How to Apply the Balance Sheet Test for Insolvency

Key Steps of the Balance Sheet Test

Calculate Your Assets: Tally the value of all assets, including tangible (property, stock) and intangible ones.
Add Up All Liabilities: Sum all outstanding debts, including loans, invoices, taxes, and crucially, prospective and contingent liabilities.
Compare Figures: If the total figure from Step 2 is greater than the total from Step 1, your company is balance sheet insolvent.

Common Mistakes to Avoid

Over-estimating Asset Figures: Always use accurate, up-to-date valuations rather than book values.
Omitting Contingent Liabilities: These must be factored in to present a true and fair view of the business.

Balance Sheet vs. Cashflow Insolvency

Feature	Balance Sheet Insolvency	Cashflow Insolvency
Definition	Total liabilities outweigh total assets.	Cannot meet demands for payment as and when they are due.
Focus	Long-term financial position (solvency).	Short-term liquidity (ability to pay bills now).
Viability	Much harder to rectify; signals fundamental financial failure.	Often negotiable; a viable company can negotiate its way out of short-term cash flow issues.
Court Action	A court is unlikely to wind up a company just because it fails this test.	Failure to pay a petitioning creditor demonstrates this; likely to lead to a winding-up order under the Insolvency Act 1986.

Implications and Your Directors’ Duties

Your Primary Responsibility

Determining if your company is insolvent should be at the top of your priority list.
You have a legal duty to act with your creditors’ best interests in mind.
Failing to do so could result in accusations of wrongful trading or fraudulent trading later on.

What Should I Do Next?

Bring in financial and insolvency experts.
They can provide a clear and definitive answer on your company’s true financial state.
They can suggest viable solutions such as administration, voluntary liquidation, or Company Voluntary Arrangements (CVAs).

Written ByRobert Moore

Marketing Manager

robertm@ksagroup.co.uk +447584583884

Rob has over a decade of experience in web and general marketing. He has extensive knowledge of the Insolvency sector and has helped many worried directors with their questions.

Rob is now working with the Board at RMT KSA to develop strategic marketing programmes to support the business plan and drive more company rescues.

Robert Moore

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