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ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Brindle Co has net assets well above its liabilities, but its main supplier has issued three unpaid invoices that are overdue by several months and Brindle has no cash to settle them. Which test of insolvency does Brindle clearly fail?

Brindle fails the cash flow test because it cannot pay debts as they fall due, despite having assets exceeding liabilities. Insolvency can exist on the cash flow test alone, regardless of balance sheet strength or how many creditors are involved.

  1. AThe balance sheet test, since assets exceed liabilities
  2. BThe cash flow test, since it cannot pay debts as they fall dueCorrect
  3. CNeither test, since the debts are owed to only one creditor
  4. DThe balance sheet test, since the invoices are overdue

Explanation

The cash flow test asks whether a company can pay its debts as they fall due. Brindle cannot meet overdue invoices, so it fails this test. It passes the balance sheet test because assets exceed liabilities, and the number of creditors does not matter.

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