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The courts have employed two principal tests, the balance sheet test and the cash
flow test, in order to determine whether the company is solvent. The tests have been
prescribed in the insolvency legislations. The outcome of the company‟s solvency
status depends on the tests used by the court. Sir Roy Goode observed that there is a
close link between the two tests:
…there is a close link between cash flow insolvency and balance sheet
insolvency in that where a company is a going concern and its business can
be sold as such with its assets in use in the business, those assets will usually
have a substantially higher value than if disposed of on a break-up basis,
divorced from their previous business activity. So a company which is
commercially solvent has a much greater chance of satisfying the balance
sheet test of solvency, than one which is unable to pay its debts as they fall
due. 24
The New Zealand Companies Act 1993 requires compliance with both tests before a
company can be held to be insolvent, while Australian Corporations Act 2001 only
recognises the cash flow test. The UK and Malaysia legislation, however, recognise
both tests but compliance with one of the tests is sufficient.
In addition to insolvency for the purpose of winding up described above, section 4(1)
of New Zealand Companies Act 1993 lays down two tests that must be satisfied
before a company is said to be insolvent. The aim of these statutory tests is to
provide guidelines on corporate restructuring and replace the capital maintenance
doctrine. 25 The section provides a company satisfies the solvency test if:
(a) the company is able to pay its debts as they become due in the normal course of
business; and
(b) the value of the company‟s assets is greater than the value of its liabilities,
including contingent liabilities.
24 Goode above n3 at [4-06].
25 Ross above n5 at 13.
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