Recent developments in the UK have ‘broadened the spectrum’ in favour of creditors, when seeking to wind-up companies. These developments may be extended to other common law jurisdictions such as Australia.
The UK Supreme Court has ruled that in determining the solvency of a company, an element of forward projection can be applied. This has expanded the traditional ‘cash flow’ test (which has been commonly relied upon by creditors when seeking to wind-up in insolvency) to include a ‘balance sheet’ test. This is likely to be a highly contentious area for the judiciary as it is inherently difficult to ascertain how far ‘forward’ the test should apply and whether a company can be deemed to be insolvent ‘today’ as a result of debts due in say 3 months’ time. Furthermore, how much weight is to be placed on contingent and/or prospective liabilities?
The potential issue for a debtor company is that it may not only have to prove that it can meet its debts as and when they fall due but also that its net asset position is positive (taking into account contingent and prospective liabilities). Financial controllers & CEO’s ought to be aware of the dangers of a negative net asset position on the balance sheet, even if they are currently cash flow positive.
These are considerations for the early stage of a company’s life cycle, both to navigate the bumpy times and deal with the growing pains when they arise. Waiting until the writing is on the wall is the worst option.