The most common application of the cash flow test is contained in s 214(a) of the Companies Act 1963 (CA 1963), where it is provided that a company shall be deemed to be unable to pay its debts if a creditor owed in excess of IR£1,000 (€ 1,269.74) has served a written demand on the company requiring it to pay the sum due within three weeks and the sum has not been paid. Clearly, a company may have an excess of assets over liabilities and yet, due to the nature of the assets, may not be in a position to pay such a debt. This deemed insolvency can be the basis for a petition to have the company wound up. The balance sheet test, however, is the relevant test when considering whether a director has traded recklessly (s 214(a), (b) or (c) CA 1963 must, at a minimum, apply) or fraudulently, as the issue of reckless or fraudulent trading arises only where creditors have suffered some loss arising from the directors’ actions. The balance sheet test applies also for the purpose of a declaration of solvency pursuant to s 256 of the 1963 Act,
which is a pre-requisite to putting a company into members’ voluntary liquidation as opposed to creditors’ voluntary liquidation. In this instance, however, the fact that assets frequently realise less than their value on a break-up basis, and also the costs of liquidation, must be taken into account. In practice, however, where one test applies the other will generally be satisfied also.