Vol 10 (2013) - Issue 5

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The Supreme Court Decision in Eurosail

Introduction
This article analyses the recent decision of the Supreme Court in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL PLC [2013] 1 WLR 1408 on the interpretation of section 123(2) of the Insolvency Act 1986 ('the Act') and its possible future implications. The decision represents the first time that the UK’s highest court has considered the meaning of section 123(2) since its introduction onto the statute book a quarter of a century ago.
Section 123(2) sets out one of the circumstances in which a company is to be deemed to be unable to pay its debts. The provision plays a key role as a jurisdictional gateway relevant to a large number of remedies made available under the Act. In addition, it plays an important role in finance documentation where it is commonly included by the draftsman as an event of default which operates as a gateway to the acceleration of the sums owed by a debtor and the enforcement of the security held by or on behalf of the lenders. Accordingly, it is easy to see why the decision is likely to have important ramifications for finance lawyers.

Section 123 of the Act
Section 123 is headed 'Definition of inability to pay debts'. The key provisions of section 123 are sections 123(1)(e) and 123(2):
(1) A company is deemed unable to pay its debts – … (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

The test found in section 123(1)(e) is commonly known as the 'cashflow test'. This provision was the subject of detailed consideration in Re Cheyne Finance plc (No. 2) [2008] Bus LR 1562, where Briggs J concluded that the test contains an element of futurity such that it is concerned not only with whether the company is able to pay debts that are immediately payable, but also with those that would be payable in the future.
The test found in section 123(2) is commonly known as the 'balance sheet test': see, for example, R v Commissioners of HM Treasury [2009] BCC 251, at [16]. There must, however, be a serious question as to whether this remains an appropriate label following the decision of the Supreme Court. The wording of section 123(2) requires the Court to strike a balance between the assets and the liabilities of a company, taking into account not only debts which are immediately due and payable, but also its contingent and prospective liabilities.