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

Kora Ltd has assets of 900,000 and total liabilities, including contingent and prospective liabilities, of 1,100,000. It is currently paying all creditors on time. Which statement is correct?

Kora Ltd is insolvent on the balance sheet test but passes the cash flow test. Its liabilities of 1,100,000, including contingent and prospective ones, exceed assets of 900,000. Paying creditors on time does not cure balance sheet insolvency.

  1. AKora Ltd is insolvent on the balance sheet test even though it passes the cash flow testCorrect
  2. BKora Ltd is solvent because it pays creditors on time
  3. CKora Ltd cannot be insolvent unless a creditor has issued a statutory demand

Explanation

Under the balance sheet test a company is insolvent if its liabilities, including contingent and prospective ones, exceed its assets. Here liabilities exceed assets by 200,000. Paying on time shows the cash flow test is passed, but that does not prevent balance sheet insolvency.

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