The role of insolvency tests: implications for Indian insolvency law

Abstract

Insolvency determination is central to the formal insolvency and bankruptcy proceedings of a debtor entity. 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 and the Balance Sheet test. While enacting IBC, India has moved away from the traditional dual test approach followed by Indian courts under the Indian Companies Act to specific Cash Flow test. This paper discusses conceptual basis of the two tests as evolved under insolvency laws of the United Kingdom and United States, with a view to comparatively study the nascent Indian insolvency regime. We conclude 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 & Bankruptcy Code, 2016. While the cash flow test is the test specified under Indian insolvency law, the paper shows, both the tests exist for a reason and Indian regime may have to adopt international experience in applying both the tests more or less jointly within the spirit of efficient debt resolution.