Cash-flow test
The cash-flow test is an assessment which can be applied to a company to determine whether it is solvent or insolvent. The cash-flow test is the principal test used by the Courts in Australia because it is derived from the statutory definition of insolvency found in section 95A of the Corporations Act 2001 (Cth).
The cash-flow test assesses the ability of a company to pay its debts (or sell its assets fast enough to pay its debts) as they become due and payable.
The cash-flow test requires an analysis of:
- The company’s existing debts;
- Whether the company’s debts are payable in the near future;
- The date each debt will be due for payment;
- The company’s present and expected cash resources; and
- The dates any company income will be received.