The Point of No Return - A Balancing Act

Originally published April 8, 2011

Keywords: UK Insolvency Act, balance sheet test, Hong Kong, Companies Ordinance, mortgage-backed loans

In BNY Corporate Trustee Services Ltd v Eurosail UK 2007 - 3BL PLC & Ors, the English Court of Appeal has decided that the mere fact that a company's aggregate liabilities exceed its assets may not render the company to be deemed unable to pay its debts under section 123(2) of the UK Insolvency Act 1986 (commonly referred to as the "balance sheet test"). The test is whether a company has reached a point of no return such that its state of affairs is not or is unlikely to continue having regard to its contingent and future liabilities.

The Hong Kong legislation contains a similar provision in section 178(1)(c) of the Companies Ordinance (Chapter 32). The English decision is not binding on Hong Kong judgments but it will likely be persuasive authority to be considered by the Hong Kong courts.