BNY Corporate Trustee Services Ltd v Eurosail- UK 2007- 3BL Plc & Ors [2010] EWHC 2005 (Ch) (30 July 2010) - s.123 considered

Sir Andrew Morritt, the Chancellor of the High Court (pictured), has handed down his judgment in BNY Corporate Trustee Services Ltd v Eurosail- UK 2007- 3BL Plc & Ors [2010] EWHC 2005 (Ch) (30 July 2010). The case concerns a number of interesting points, not least an historical exposition of s.123 of the Insolvency Act 1986. The learned judge notes:

"The first question, as set out in paragraph 5 above, is whether, without regard to the PECO, Eurosail is now unable to pay its debts within the meaning of section 123(2) of the Insolvency Act 1986 ("the Act") for the purposes of Condition 9(a)(iii) of the Conditions. That depends on how the requirement to 'take into account [the company's] contingent and prospective liabilities' is to be interpreted and applied when determining whether the value of the company's assets is less than the amount of its liabilities. Counsel for the A3 Noteholders submits that prospective liabilities must be taken into account at their face value irrespective of their maturity date or the rate of interest payable in the meantime. In support of that proposition he relies on the decision of the Court of Appeal in Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232.
  1. Before I refer to that case it is necessary to trace the changes in the relevant section of the Insolvency Act. That task was recently performed by Briggs J in Re Cheyne Finance plc [2008] 2 AER 987 paras [30]-[36] which I gratefully quote and adopt. Briggs J said:
    2. "30. Section 80 of the Companies Act 1862 provided to the extent relevant as follows:
    "A Company under this Act shall be deemed to be unable to pay its Debts…
    Whenever it is proved to the satisfaction of the Court that the Company is unable to pay its debts."
    31. In re European Life Assurance Society (1869) 9 LR Eq 122, it was held that 'debts' in s.80 meant only those actually due. Furthermore, prospective creditors had no locus to petition.
    32. Section 28 of the Companies Act 1907 both permitted prospective creditors to petition and required the court to have regard to contingent and prospective liabilities when applying the 1862 Act. That new provision was consolidated in the Companies (Consolidation) Act 1908 in s.130 in the following form:
    "A company shall be deemed to be unable to pay its debts –…
    (iv) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company."
    33. No substantive change occurred in 1929 in s.169(4) of that Act; or in 1948 in s.223(d) of that Act; nor indeed in the 1985 Companies Act in s.518(1)(e), despite slight changes in the language.
    34. During the long period from 1907 to 1985 English courts addressed the questions posed by, for example, s.223(d) of the 1948 Act, without any rigid distinction between commercial and cash flow insolvency on the one hand and balance sheet insolvency on the other. The submission that commercial insolvency could not be established by reference to future debts could not have succeeded. This is reflected, for example, in the decision of the Court of Appeal in Byblos Bank SAL v. Al-Khudhairy [1987] BCLC 232, in which inability to pay debts within s.223 of the Companies Act 1948 was incorporated into a debenture as a trigger for the appointment of Receivers. Nicholls L.J. said this (at 247):
    "Construing this section first without reference to authority, it seems to me plain that, in a case where none of the deeming paras (a), (b) or (c) is applicable, what is contemplated is evidence of (and, if necessary, an investigation into) the present capacity of a company to pay all its debts. If a debt presently payable is not paid because of lack of means, that will normally be sufficient to prove that the company is unable to pay its debts. That will be so even if, on an assessment of all the assets and liabilities of the company, there is a surplus of assets over liabilities. That is trite law.
    It is equally trite to observe that the fact that a company can meet all its presently payable debts is not necessarily the end of the matter, because para.(d) requires account to be taken of contingent and prospective liabilities. Take the simple, if extreme, case of a company whose liabilities consist of an obligation to repay a loan of £100,000 one year hence, and whose only assets are worth £10,000. It is obvious that, taking into account its future liabilities, such a company does not have the present capacity to pay its debts and as such it 'is' unable to pay its debts. Even if all its assets were realised it would still be unable to pay its debts, viz, in this example, to meet its liabilities when they became due."
    35. [Counsel] described this as a case about balance sheet insolvency. I disagree. Nicholls L.J. is speaking about the ability of the company to meet its liabilities when they became due. What is striking, and for present purposes persuasive, is his explanation that the phrase "is unable to pay" is a reference to the company's present capacity, not to the date upon which relevant debts will fall due."
  2. Accordingly, this appears to be the first time the proper interpretation of the requirement in s.123(2) to "[take] into account [the company's] contingent and prospective liabilities" has required such close consideration. 

  1. I return then to the wording of s.123(2), as amended for the purposes of Condition 9(a)(iii). It reads:
    2. "A company is also deemed unable to pay its debts if … the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities".
    Having regard to how that sub-section has developed, as described by Briggs J in Re Cheyne Finance plc, such guidance as is afforded by Re a Company and Byblos Bank SAL v Al-Khudhairy and the wording of the subsection, I derive a number of propositions.
  2. First, the assets to be valued are the present assets of the company. There is no question of taking into account any contingent or prospective assets. Thus the conclusion of the Court of Appeal in Byblos Bank SAL v Al-Khudhairy is as applicable to s.123(2) as it is to s.123(1)(e). The subsection provides no guidance as to the basis of that valuation. As the assets in question are those of the company presumably they are to be assessed at their value to the company but whether on a going concern or break-up basis is unclear. That problem does not arise in this case due to the nature of the Issuer's business and its assets. What does arise is the question whether the claims of the Issuer in the liquidation of Lehman Brothers are present assets and if so their value. In my view they are clearly existing assets notwithstanding that they have not been admitted. Their present value may be more debatable but the evidence suggests that unadmitted claims are being traded on a secondary market at 35%-37% of their face value (subject to recourse requirements to the seller). I can see no reason why they should not be included in the assets of the Issuer at that value.
  3. Second, the requirement 'to take account of contingent and prospective liabilities' cannot require such liabilities to be aggregated at their face value with debts presently due. Such inclusion would be commercially illogical; an obligation to pay £100 today has a higher present value than an obligation to pay £100 in five years. Had the simple aggregation of present and prospective liabilities been intended the subsection would have provided that the amount of its liabilities "include its contingent and prospective liabilities". Given that simple aggregation of present and prospective liabilities is not required then the conversion of prospective liabilities denominated in some currency other than sterling into sterling at the present spot rate is not required either.
  4. Third, subject to the foregoing, the subsection is silent as to what 'taking account of' a prospective liability involves. On the one hand a prospective liability cannot simply be added at its face value to the present liabilities of the company; on the other it cannot be ignored. In my view, the content of 'taking account of' must be recognised in the context of the overall question posed by the subsection, namely whether the company is to be deemed to be insolvent because the amount of its liabilities exceeds the value of its assets. This will involve consideration of the relevant facts of the case, including when the prospective liability falls due, whether it is payable in sterling or some other currency, what assets will be available to meet it and what if any provision is made for the allocation of losses in relation to those assets."


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