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Q&As
Is entry into insolvency an event of frustration for a contract?
Published on: 19 January 2017
For the purposes of this Q&A we have assumed that the contract does not expressly provide for termination on an Insolvency event.
A contract may be frustrated if an unforeseen event occurs after the contract is formed and:
- •
as a result of that event:
- ◦
the contract becomes impossible to perform, and/or
- ◦
the obligations under the contract are transformed into something radically different
- ◦
- •
the contract does not contain a clause intended to deal with the unforeseen event
- •
the unforeseen event is not caused by either party’s conduct
Frustration of a contract takes place when: '…there supervenes an event (without default of
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Jurisdiction(s):
United Kingdom
Key definition:
Insolvency definition
What does Insolvency mean?
This can be defined by two alternative tests (Insolvency Act 1986, s 123):
• cash flow test: a company is solvent if it can pay its debts as they fall due, no matter what the state of its balance sheet (Re Patrick & Lyon Ltd [1933] Ch 786);
• balance sheet test: a company which can pay its debts as they fall due may be insolvent if, according to its balance sheet, liabilities (including contingent liabilities) exceed assets.
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