In a bankruptcy case in Illinois, the three tests for insolvency came into play when a dispute arose as to whether transfers the debtor company made totaling $1.72 million were fraudulent. The key issue in matters of fraudulent transfers is whether the debtor was solvent when it made the transfer (or would remain solvent as a result of the transfer). The three solvency tests (under Section 548 of the Bankruptcy Code) are: (1) the balance sheet test (do assets exceed liabilities?); (2) the cash flow test (can the company pay off debts as they come due?); and (3) the capital adequacy test (does the company have enough capital to operate?). If the debtor fails any one of the tests, it is an indication of a fraudulent transfer.
In this case, while the debtor passed the balance sheet test, it failed the other tests, the court found. Also, the court concluded that the company “received no value in exchange” for the transfers, noting that they were made not to satisfy company debts, but rather for the benefit of the controlling shareholder, who used the company as his “personal piggy bank.” Therefore, the transfers are fraudulent and must be refunded to the bankruptcy estate.
The case is Stone v. Citizens Equity First Credit Union (In re Int’l Supply Co.), 2022 Bankr. LEXIS 865; 2022 WL 962296, and a case analysis and full opinion are available on the BVLaw platform.
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