The role of insolvency tests: implications for Indian insolvency law

Abstract

ABSTRACT In determining whether a company is solvent or insolvent, two tests are generally used by the bankruptcy courts across all jurisdictions: the Commercial Cash Flow test and the Balance Sheet test. While enacting the Insolvency and Bankruptcy Code in 2016, India has moved away from the traditional dual test approach followed by Indian courts under the Indian companies Act to a specific Cash Flow test. This paper discusses the conceptual basis of the two tests as evolved under insolvency laws of the United Kingdom and the United States, with a view to comparatively study the nascent Indian insolvency regime. The paper concludes that irrespective of the statutorily prescribed test, over the years, courts across jurisdictions have taken recourse to both the tests to ascertain the overall commercial viability. In this lies an answer for India’s work in progress – Insolvency and Bankruptcy Code.