New Zealand: When is broke broke? A UK Supreme Court perspective on insolvency

Brief Counsel

Like many legal tests, the test for insolvency is easy to state, but hard to apply in practice.

The United Kingdom Supreme Court (UKSC)1 has recently issued an important clarification, which confirms that an element of forwards projection must be applied – extending in extreme cases to assessments of balance-sheet as well as cash-flow solvency.

This liberal approach is likely to be followed in New Zealand, despite differences in statutory wording.

The concept of inability to pay debts is woven throughout the Companies Act 1993. Ability to pay debts is a prerequisite for the making of a distribution, such as a dividend (see the section 4 solvency test), and a transaction entered into at a time when the company is unable to pay its debts is voidable by a liquidator (section 292). A company may also be placed in liquidation if is unable to pay its debts (section 241(4)(a)). This will be the case if fails to comply with a statutory demand or if there is proof by "other means" that it cannot pay its debts. Section 288(4) provides that "[i]n determining whether a company is unable to pay its debts, its contingent or prospective liabilities may be taken into account".

But what does this important test mean in practice? In particular:

  • how far into the future does the test extend? What result if a company is able to pay its debts today, but is highly unlikely to do so in three months' time?
  • in what circumstances will a contingent or prospective (but uncertain) liability render a company unable to pay its debts?

The UKSC decision in the Eurosail Case

The UKSC came to consider these questions in the context of loan notes issued in the course of a 2007 Lehman Brothers transaction, which incorporated by reference (with small modifications) section 123 of the Insolvency Act 1986 (the UK Act).

Section 123 – which roughly, but not precisely, corresponds to our sections 287 and 288 – contains two relevant limbs under which a company is deemed unable to pay its debts:

  • the "cash-flow" insolvency limb: "if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due" (s 123(1)(e)), and
  • the "balance-sheet" insolvency limb: "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"(s 123(2)).

The issue was whether an event of default had occurred with respect to the loan notes, in that Eurosail, the issuer of the notes, was unable to pay its debts within the meaning of s 123. If so, repayment priorities would alter. Thus different classes of noteholders had different interests in the argument.

Key conclusions were:

  • the cash-flow test is concerned not simply with the company's presently-due debt, but also with debts falling due from time to time in the "reasonably near future". What is the reasonably near future will depend on all the circumstances, but especially on the nature of the company's business
  • once the court has to move beyond the reasonably near future, any attempt to apply a cash-flow test will become "completely speculative". Hence "the only sensible test" is to consider assets and liabilities, including contingent and prospective liabilities, and
  • as this is still "very far from an exact test", the court should proceed with the greatest caution in deciding that the company is balance-sheet insolvent.

On the facts, the court agreed that it could not be said that Eurosail was unable to pay its debts. This is unsurprising. Eurosail was not an operating business, but what was described as a "closed system". Its ability or inability to pay its debts, present or future, may not be finally determined until 2045, depending upon future currency, interest rate and general economic conditions.

These factors, if not entirely speculative, cannot be predicted with any confidence in 2013. The court could not therefore be satisfied that there will eventually be a deficiency.

Application of the Eurosail decision for New Zealand?

The New Zealand statutory context is different from that of the UK. While the solvency test refers to both cash-flow and balance-sheet insolvency, the test for liquidation on account of inability to pay debts does not expressly refer to balance-sheet insolvency. It has accordingly been interpreted as being focused solely on cash-flow issues.2

But a strictly cash-flow approach has always been difficult to apply far into the future. The UKSC's decision emphasises that the possession of assets insufficient to meet liabilities was historically recognised as one species of inability to pay debts. In other words, the phrase "unable to pay its debts" implicitly embraces elements of a balance-sheet insolvency test. This is especially so when, as in New Zealand, the court may take account of contingent and prospective liabilities.

The Eurosails decision is accordingly likely to be used in New Zealand to undermine a rigid distinction between the cash-flow and the balance-sheet tests for the purposes of liquidation applications. It is already established in New Zealand that the solvency test must be applied with a sense of "commercial reality so that the directors may look to the immediate future and past, as well as the present, in determining whether the test is satisfied".3 A more far reaching approach may now be taken to liquidation applications, such that there is really a single sliding scale of inability to pay debts, encompassing aspects of the traditional cash-flow and balance-sheet tests. On this approach, a company would be unable to pay its debts both:

  • where, due to liquidity constraints, it cannot do so in the present or reasonably near future, and
  • where, due to fundamental balance-sheet weakness, it cannot be reasonably expected to meet all of its contingent and prospective liabilities.

It is obviously a very difficult decision for a court to place a company into liquidation where it is able to meet its debts as they presently fall due. Thus, arguments based on futurity will often be labelled, as they were in Eurosails, as mere speculation. But the door to such arguments is now firmly open in the United Kingdom, and ajar in New Zealand.


1BNY Corporate Trustee Services Limited & Ors v Neuberger Berman Europe Ltd & Ors; BNY Corporate Trustee Services Limited & Ors v Eurosail-UK 2007-3BL PLC [2013] UKSC 28 (the Eurosail Case).

2See, e.g., Brookers Insolvency Law CA241.03.

3Vercauteren v B-Guided Media Ltd [2011] NZCCLR 9, at [43].

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Michael Arthur
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions