ARTICLE: DELAWARE'S SOLVENCY TEST: WHAT IS IT AND DOES IT MAKE SENSE? A COMPARISON OF SOLVENCY TESTS UNDER THE BANKRUPTCY CODE AND DELAWARE LAW Skip over navigation
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Copyright (c) 2011 The Widener University School of Law
Delaware Journal of Corporate Law

ARTICLE: DELAWARE'S SOLVENCY TEST: WHAT IS IT AND DOES IT MAKE SENSE? A COMPARISON OF SOLVENCY TESTS UNDER THE BANKRUPTCY CODE AND DELAWARE LAW

2011

Delaware Journal of Corporate Law

36 Del. J. Corp. L. 165

Author

By Robert J. Stearn, Jr. and Cory D. Kandestin*

Excerpt



I. Introduction



Insolvency currently is a hot topic in corporate law, with the discussion focused primarily on how it affects directors' fiduciary duties. In this article, we do not wade into that discussion. Instead, we write about a more fundamental subject: how does Delaware law determine when a corporation is insolvent?



Delaware law recognizes that a corporation is insolvent if it fails either of two tests: the "balance sheet" test or the "cash flow" test. 1 These tests are not statutorily defined; rather, they developed in case law 2 and the courts have not defined the tests uniformly. In some instances, Delaware cases define the balance sheet test in its "traditional" sense, where an entity is insolvent if it "has liabilities in excess of a reasonable market value of assets held." 3 Other cases, however, have applied what appears to be a narrower balance sheet test, where insolvency occurs when a company has "a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof." 4 Likewise, no Delaware case specifies whether to apply the cash flow test in a forward-looking manner or a present manner. The forward-looking version asks whether the company will be able to pay its debts as they become due in the near future, whereas the present version of the test simply asks whether the debtor currently is paying its debts.



As it now stands, Delaware case law on solvency is ...
 
 
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