Vol 5 (2008) - Issue 3

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Re Cheyne Finance plc and Commercial Insolvency

Section 123 of the Insolvency Act 1986 incorporates two tests for insolvency: the balance sheet test (whether liabilities exceed assets) and the commercial/cash-flow insolvency test (whether debts can be paid as they fall due). Which of the two tests is relied upon frequently depends on the context in which the question of insolvency is raised, and the information available to the
party seeking to establish insolvency. Most creditors’ winding-up petitions are, for example, determined on the basis of commercial insolvency: that a company has failed to pay a debt currently due and owing, and in respect of which demand for repayment has been made. The failure to pay in circumstances where there is no genuine dispute as to whether the debt is owing in itself establishes a company’s inability to pay its debts.

Prior to the decision of the English High Court in Re Cheyne Finance Plc [2007] EWHC 2402 (Ch), the majority of commentators in this area had expressed the view that the wording of Section 123 was such that, in the context of the English legislation, the cash-flow test must be seen as focusing on a present inability to pay an accrued liability. The language of Section 123(1) (e) is phrased in the current rather than future tense (‘is unable’, as opposed to ‘will be unable’). The typical dictionary definition of fall due is ‘become immediately payable’ and the notion of a debt being due is one which was thought to be such that ‘debts payable in the future, prospective debts and contingent liabilities
must all be ignored’. In this regard, Section 123(2) of the Insolvency Act 1986 (which contains the balance sheet test of insolvency) makes specific reference
to prospective and contingent liabilities whereas there is no equivalent reference in Section 123(1)(e). The conclusion reached by academics such as Professor Fletcher was therefore that:

‘What is of the essence, for the purposes of Section 123(1)(e), is the demonstration, by suitable and credible evidence, that the company is failing to pay its mature liabilities within a reasonable time of their becoming due …’

Not all agreed that this should be the approach to assessing commercial insolvency, Professor Goode argued that the Court could consider debts which fell due in the ‘near future’ or ‘not too distant future’ (i.e. that although contingent and prospective liabilities were excluded, the date of assessment was capable of including an element of futurity). But the majority view appeared
to be that, as a consequence of the language used in Section 123(1)(e), there was little scope for consideration to be given to debts other than those immediately due and payable.

This was to be contrasted with the approach adopted in Australia. In a series of Australian cases commencing with Bank of Australia v Hall (1907) 4 CLR 1514, and extending to the current day, a wider approach had been adopted to the concept of commercial insolvency. Notably, that approach had been adopted in the context of a statutory scheme which did not make express provision for a test of balance sheet insolvency.