ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration
Zeta Ltd is unable to pay its debts as they fall due, although its asset values are higher than its total liabilities. Which insolvency test is Zeta Ltd failing?
Zeta Ltd is failing the cash flow test. This test looks at whether a company can meet its debts as they fall due, and Zeta cannot, even though its assets exceed its liabilities, so the balance sheet test is not failed.
- AThe balance sheet test
- BThe cash flow testCorrect
- CThe capital maintenance test
Explanation
The cash flow test asks whether a company can pay its debts as they fall due. Zeta fails it even though assets exceed liabilities. The balance sheet test would only be failed if liabilities exceeded assets, which is not the case here.
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