Jurisdiction(s):
United Kingdom

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...

Security and Guarantees in Loan Transactions: Unsecured vs Secured Facilities, Negative Pledges, Priority, Perfection and Corporate Benefit under English Law

Published by a LexisNexis Banking & Finance expert

Practice notes

Should a borrower enter Insolvency, the lender might be required to divide the borrower’s available assets with fellow creditors and, consequently, recover only a portion of the sums due. Lenders commonly take security to guard against this exposure and improve the chances of repayment. When security is in place, the lender acquires an interest over the security provider’s asset(s), offering comfort that, if the borrower becomes insolvent, amounts can be recovered. As an alternative (or as well), a lender may obtain a third-party guarantee in respect of the borrower’s obligations. If the borrower does not repay, the lender can demand payment from the guarantor. This further raises the prospect of repayment, especially where the guarantor has strong credit or holds influence or control over the borrower (for instance, where it is the borrower’s parent). Not every loan facility is secured. Both approaches are intended to increase the chances that the lender is repaid even if the borrower cannot meet its obligations following the borrower’s failure to repay...

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Web page updated on 21/05/2026

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