Mumbai: Hexion Specialty Chemicals Inc has filed a suit to cancel its $10.6 billion acquisition of Huntsman Corporation because, it said, a merger would make the combined company insolvent.

In its suit filed in the Delaware Court of Chancery in Wilmington, Hexion said it believed that the capital structure agreed to by Huntsman and Hexion for the combined company was no longer viable because of Huntsman's increased net debt and its lower than expected earnings.

''While both companies individually are solvent, Hexion believes that consummating the merger on the basis of the capital structure agreed to with Huntsman would render the combined company insolvent,'' Hexion said in a release.

Hexion said the merger proposal ''is not viable and no bank will provide debt financing for the merger contemplated by their commitment letters.''

Huntsman's net debt has increased, and its earnings were lower than expected since the companies agreed to merge in July 2007, Columbus, Ohio-based Hexion said in the complaint.

Hexion had agreed to acquire Salt Lake City-based Huntsman for $28 a share.

"The financing for the acquisition is predicated on a certain level of financial performance and, given the increase in Huntsman's total debt and decrease in earnings, Hexion does not believe that the transaction can be completed," Hexion chief executive Craig Morrison said in a statement.

Hexion, the biggest plywood-adhesives producer,  stated in its suit that while it will continue to use its reasonable best efforts to close the transaction, which includes obtaining all necessary antitrust and regulatory approvals as required by the merger agreement, it does not believe that alternate financing will be available.

Hexion, however, is believed to have financing commitments from Credit Suisse Group and Deutsche Bank.

Hexion said its board of directors has received an opinion from Duff & Phelps LLC investment banking services that based on the capital structure agreed to by the parties at the time the merger agreement, the combined company would be insolvent as it would not meet the standard tests of solvency and capital adequacy.

''While both Hexion and Huntsman can be successful as separate companies, they cannot now support the debt load that was agreed to at the time the transaction was put together,'' said Morrison. ''We continue to have enormous respect for Huntsman, the Huntsman family and management team and still believe that a combination of the two companies would offer significant strategic benefits,'' he added.

The transaction includes $4 billion of assumed debt and $100 million toward a $200 million fee that Huntsman paid Access Industries Holdings to end their merger agreement. New York-based Access had offered to buy Huntsman for $25.25 a share before Hexion bid $27.25 and then $28.

Hexion, a unit of Apollo Management, shouldn't have to pay Huntsman a $325 million fee to end the merger because Huntsman's financial deterioration constitutes a "material adverse effect" under their agreement, Hexion said.

Hexion Specialty Chemicals, based in Columbus, Ohio, is controlled by an affiliate of Apollo Management LP.

The court will decide whether the merger can be terminated  by determining if the cause of the company's worsening results is deeper than a couple of bad quarters.

Companies, however, are seldom allowed to wriggle out of their corporate responsibilities citing such reasons to rescind buyout offers. A chancery judge had forced Tyson Foods, the second-largest US poultry producer after Pilgrim's Pride, to complete a $4.7 billion acquisition of rival IBP in 2001.