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Lloyd's Maritime and Commercial Law Quarterly

UNDERSTANDING COMMERCIAL INSOLVENCY AND ITS JUSTIFICATIONS AS A TEST FOR WINDING UP

Meng Seng Wee*

In BNY v Eurosail, the Supreme Court gave two different meanings to the word “deemed” in the Insolvency Act 1986, s.123 (the “unable to pay its debts” ground of winding up) and there was an unarticulated premise that single default was an inadequate basis for commercial insolvency tests. This article argues that, first, “deemed” has only one meaning in s.123 and that it does not create a statutory fiction but states conclusively that a company is insolvent if any of the tests listed therein is proved. Secondly, it argues that the premise is unfounded, as multiple defaults was an inappropriate criterion for commercial insolvency tests.

I. INTRODUCTION

The Insolvency Act 1986, s.123 contains four tests for insolvency (inability to pay debts). Three of the tests are commercial (or cash flow) insolvency tests, and will be referred to, respectively, as the neglect to meet a statutory demand test (s.123(1)(a)), the unsatisfied execution test (s.123(1)(b)) and the general commercial insolvency test (inability to pay debts as they fall due: s.123(1)(e)). The fourth test is the balance sheet insolvency test found in s.123(2) (where the value of the company’s assets is less than the amount of its liabilities). English case law on the four tests, albeit not substantial, has worked remarkably well in practice. Perhaps because it has done so, there has been little discussion of the meanings of commercial insolvency or balance sheet insolvency and the justifications for using them as tests for winding up.
As a result, the insolvency tests have not been as well understood as they should be, and this was brought home forcefully in two recent cases, Re Cheyne Finance Plc (No 2)1 and BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL Plc.2 In particular, there was an unarticulated premise in Eurosail that, although a company that has committed a single default would be commercially insolvent under s.123(1)(a) and (b) and so might be wound up, single default was an inadequate basis for that purpose and, as a matter of theory or policy, multiple defaults was a sounder basis. This article seeks to prove that the premise is unfounded and that single default is the correct criterion for the commercial insolvency tests.


UNDERSTANDING COMMERCIAL INSOLVENCY AND ITS JUSTIFICATIONS

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