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meaning of inability to pay debts. 22 For the purpose of winding up, the company is
insolvent if it fails to pay its debts when they fall due (also known as the cash flow
test) or if the liabilities of the company exceed its assets (also known as the balance
sheet test). A company is also deemed to be unable to pay its debts for the purpose of
winding up if it fails to comply within stipulated time to the written demand, or if
judgment in favour of creditors remains unsatisfied in whole or in part. 23
22 See section 123 of the UK Insolvency Act 1986; section 287 of the New Zealand Companies Act
1993; section 95A of the Australian Corporations Act 2001; section 218(2) of the Malaysian
Companies Act 1965.
23 However, there are slight differences as to the exact wording of these provisions.
Section 123(1) of the UK Insolvency Act 1986 defines inability to pay debts to cover situations
such as:
a) if the company neglected to pay to the creditors demand for a sum exceeding ₤750 after
three weeks a written demand has been served;
b) if execution or other process judgment in favour of creditors is returned unsatisfied in
whole or in part;
c) (provision applicable to (Scotland);
d) (provision applicable to (Northern Ireland);
e) if it is proved to the satisfaction of the court that the company is unable to pay its debts
as they fall due.
Section 123(2) of the same Act also deemed a company to be unable to pay its debts if the court is
satisfied that the value of the company‟s assets is less than the amount of its liabilities taking into
account its contingent and prospective liabilities.
The New Zealand provisions in section 287 provide that the company is deemed to be unable to pay
its debts if the company has failed to comply with a statutory demand, or execution issued in respect
of judgment debt has been returned unsatisfied, or a person entitled to a charge over all or
substantially all of the company‟s property has appointed a receiver under the instrument creating the
said charge, or a compromise between a company and its creditors has been voted for but is yet to be
approved. Section 288 provides that in deciding whether the company is insolvent, its contingent and
prospective liabilities may be taken into account.
The Malaysian Companies Act 1965 is still applying the definition used in section 223 of the UK
Companies Act 1948. Section 218(2) states the company is deemed to be unable to pay its debts if; a
company fails to comply with the creditors demand for a sum exceeding RM500 three weeks after
notice has been served on the company in compliance with the said provision; execution or other
process issued on a judgment in favour of creditors is returned unsatisfied in whole or in part; 23 or the
court is satisfied that the company is unable to pay its debts taking into account its contingent and
prospective liabilities.
The Australian Corporations Act 2001, on the other hand, defines it as a person is solvent if and only
if, the person is able to pay all the person‟s debts as and when they become due. Subsection (2) then
states that a person who is not solvent is insolvent. Under this section only the cash flow test is
recognized.
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