A company or partnership is insolvent if it has insufficient assets with which to discharge its debts and liabilities, which is essentially a question of fact rather than one of law. Different tests to determine insolvency apply, depending on the context in which the expression is used.
When referring to a state of insolvency, the Insolvency Act 1986 uses the phrase "unable to pay its debts". Section 123 of the Insolvency Act 1986 provides that a company is deemed unable to pay its debts where:
The company has not paid, secured or compounded a claim for a sum due to a creditor (www.practicallaw.com/2-379-0852) exceeding £750 within three weeks of having been served with a written demand in the statutory form (known as a statutory demand (www.practicallaw.com/4-107-7317)).
A creditor has attempted execution (www.practicallaw.com/0-107-6579) or another enforcement process against the company in respect of a debt without success.
It is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due (cash flow test).
It is proven to the satisfaction of the court that the value of the company's assets is less than its liabilities, taking into account contingent and prospective liabilities (balance sheet test).