Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Insolvency definition

What does Insolvency mean? In practice, insolvency describes a financial state where a debtor cannot meet liabilities when due, triggering remedies such as administration, liquidation or bankruptcy and informing directors’ duties and avoidance claims. For companies in England & Wales, Scotland and Northern Ireland, the Insolvency Act 1986, s 123 sets two alternative tests: - Cash‑flow insolvency: an inability to pay debts as they fall due. The inquiry is practical and forward‑looking, not confined to today’s bills (Re Patrick & Lyon Ltd [1933] Ch 786; BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28). - Balance‑sheet insolvency: liabilities (including contingent and prospective liabilities) exceed assets on...

Charity insolvency in England and Wales: tests, procedures by legal form, restricted funds, trustee liability and Charity Commission powers

Published by a LexisNexis Private Client expert

Practice notes

As many charities grapple with financial strain—from difficulties raising finance, falling donations and weaker investment returns, to cancelled or defaulted major contracts, public funding reductions and mounting pension deficits—some risk slipping into insolvency...

Definition of insolvency

The Insolvency Act 1986 (IA 1986) offers no explicit definition. Nevertheless, two tests are commonly relied upon to identify insolvency:

where liabilities outweigh assets (“balance sheet” insolvency)
where debts cannot be met as they fall due (“cash flow” insolvency)

Charities are typically incorporated (often as companies limited by guarantee) or unincorporated, though some are created by Act of Parliament or Royal Charter. Different rules apply to incorporated and unincorporated bodies...

For an incorporated charity, it is treated as “unable to pay its debts” if any of the following occur:

it does not pay, secure, or settle a creditor’s claim over £750 within three weeks of receiving a statutory demand
a creditor’s enforcement process against it has failed
it fails the “cash flow” test
it fails the “balance sheet” test

One key...

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Web page updated on 21/05/2026

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