In May 2013, the Supreme Court handed down judgment in the case of BNY Corporate Trustee Services Limited and others v Eurosail-UK 2007-3BL PLC. This is an important case for insolvency practitioners and company directors because of its discussion of when a company will be deemed unable to pay its debts. Despite the differences in wording between the applicable English and Manx legislation, the case is likely to be followed by the Isle of Man courts if the point arises for determination here.
The facts of the Eurosail case
Eurosail issued loan notes to the value of £660 million in order to fund the purchase of a portfolio of mortgage loans secured on UK residential property. The mortgage loans were valued at £650 million. The loan notes were issued in varying orders of priority and some were not redeemable until 2045.
The terms of the loan notes stated that if Eurosail became "unable to pay its debts", this constituted an "Event of Default" and the trustee of the noteholders' rights (the claimant BNY) would be entitled to serve an enforcement notice upon Eurosail. The consequence of this was that the loan notes would become immediately due and payable.
Against the backdrop of the global credit crunch and the fall in UK residential property values, BNY issued proceedings to determine whether Eurosail was "unable to pay its debts" as defined in section 123 of the Insolvency Act 1986 (an Act of Parliament) (the "Act").
Giving the leading judgment, Lord Walker explained that the question of whether or not a company is able to pay its debts is a twofold test. The first inquiry, under section 123(1)(e) of the Act, is to ask whether the company is unable to pay its debts 'as they fall due' (also known as the "cash-flow" test). The second inquiry, under section 123(2) of the Act, is to ascertain whether the 'value of the company's assets are less than the amount of its liabilities, taking into account its contingent and prospective liabilities' (also known as the "balance-sheet" test).
On the facts of the case, Eurosail was not "unable to pay its debts". It was not "cash-flow" insolvent, because some of the debts due on the loan notes were not payable until 2045, and the cash-flow test is concerned with debts falling due from time to time in the reasonably near future. Nor was Eurosail "balance-sheet" insolvent, because the value of its liabilities could not be finally determined until much closer to 2045. Lord Walker agreed with the comments of Toulson LJ in the Court of Appeal that the more distant the company's liabilities, the harder it will be to establish balance-sheet insolvency. Lord Walker emphasised that whether the balance-sheet test is satisfied or not will depend upon the circumstances of each case and the activities of the company concerned.
Corporate insolvency in Manx law
The definition of inability to pay debts in Isle of Man law is found in section 163 of the Companies Act 1931. By virtue of section 182 of the Companies Act 2006, section 163 applies equally to companies formed under the Companies Act 2006 as it does to companies formed pursuant to the Companies Acts 1931-2004. Section 163 reads:
"A company shall be deemed unable to pay its debts –
(3) 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."
This definition is somewhat circular ("a company shall be deemed unable to pay its debts... if the company is unable to pay its debts") and on its face appears to contain an apparent mix between the cash flow test and the balance sheet test, without specifically referring to either. Despite this, it is strongly arguable that both the cash-flow and balance-sheet tests apply to Isle of Man companies. The reason for this is that section 163 Companies Act 1931 replicates that of section 130(iv) of the Companies (Consolidation) Act 1908 (an Act of Parliament), and case law based upon successor legislation to the Companies (Consolidation) Act 1908 has held that the two tests are inherent in the wording of section 130(iv).
There is no Manx case law specifically considering the interpretation of section 163(3).
In Re a Company  BCLC 262 (also known as the Bond Jewellers case) Nourse J held that the phrase "as they fall due", although not part of the statutory text relating to inability to pay debts, was understood to be implicit in the legislation. In Byblos Bank SAL v Al-Khudhiary  BCLC 232, the Court of Appeal referred to 'an assessment of all the assets and liabilities of the company' even though that phrase was not explicitly included in the legislation.
In Eurosail Lord Walker expressed the view that neither the notion of paying debts "as they fall due" nor the notion of balance-sheet insolvency were unfamiliar prior to the Insolvency Acts 1985 and 1986, despite the lack of specific reference to them in earlier legislation. Given Lord Walker's comments, it is likely that the Manx courts would follow the Eurosail judgment and hold that the cash-flow and balance sheet tests are inherent in section 163 of the Companies Act 1931.
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