Misconceptions About the 'Unable to Pay Its Debts' Ground of Winding Up
Law Quarterly Review, 2014
31 Pages Posted: 12 Aug 2015 Last revised: 16 Dec 2015
Date Written: October 1, 2014
Inability to pay debts is a common ground for winding up insolvent companies in many jurisdictions. The English version contained three commercial (or cash flow) insolvency tests and a balance sheet insolvency test. The three commercial insolvency tests are: neglect to meet a statutory demand, unsatisfied execution, and inability to pay debts as they fall due or general commercial insolvency.
In Re Cheyne Finance plc  EWHC 2402 (Ch) the English High Court, drawing on Australian law, held that there was an element of futurity in the commercial insolvency test and that historically the courts did not draw a sharp distinction between commercial insolvency and balance sheet insolvency. Cheyne was approved by the Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc  UKSC 28.
This article argues as follows. First, the two cases have misunderstood the law on the four insolvency tests. Before Cheyne the three commercial insolvency tests were based on the failure of a company to pay an undisputed debt in respect of which repayment has been demanded, ie, a single default on the part of the company. There was a unified doctrine of the commercial insolvency tests. Secondly, the pre-Cheyne approach to the commercial insolvency tests was creditor-centric. It was sound and efficient and there was no need to draw on Australian law. Thirdly, in any event, the two cases did not appreciate fully the complex and different history of the Australian law when they adopted it. Finally, the two cases have made it much harder for creditors to rely on the general commercial insolvency test and they would in future have to rely more on the other commercial insolvency tests. This will have an adverse impact on trading creditors in particular.
Keywords: Balance sheets; Bankruptcy; Cash flows; Corporate insolvency; Future Liabilities; Legal History; Statutory Interpretation; Winding Up
JEL Classification: G33; K1; K10; K22
Suggested Citation: Suggested Citation