Cheyne Finance Plc, Re

A contractual insolvency trigger incorporating the commercial insolvency test in Insolvency Act 1986 section 123(1) permits consideration of debts falling due in the future. The inquiry is not confined to debts presently payable. It is a commercially realistic and fact-sensitive assessment of whether the company can pay all relevant debts as they fall due.

Receivers must make that assessment after careful enquiry and be satisfied on the balance of probabilities that inability to pay is more likely than not. Before an insolvency event, a receiver’s management objective is timely payment in full of all senior debts. It does not create an implied priority for earlier-maturing debts over later-maturing debts of equal seniority.

This was an urgent first-instance application by the receivers of Cheyne Finance Plc, Re for directions on the meaning of an “Insolvency Event” in the contractual documents governing the receivership.

On assumed facts, continued asset sales sufficient to meet senior debts on their maturity dates were likely to require forced-sale discounts. Those discounts were likely to cause a later default. A sale of the portfolio as a whole offered a better prospect of paying all senior debts, but not on their contractual maturity dates.

The central issue was whether the contractual incorporation of the cash-flow test in Insolvency Act 1986 section 123(1) allowed the receivers to consider future senior debts, and the degree of confidence required before they could determine that an insolvency event had occurred.

1. The application for directions was granted. On the assumed facts, Cheyne was unable to pay its senior debts as they fell due. The receivers could therefore determine that an insolvency event had occurred.

2. The contractual reference to Insolvency Act 1986 section 123(1), while excluding the balance-sheet test in section 123(2), required a test of commercial rather than balance-sheet insolvency. The phrase “as they fall due” permits consideration of future debts. It does not require a blinkered inquiry confined to debts currently payable or imminently payable.

3. The permissible forward-looking inquiry is fact-sensitive. It must assess the company’s present capacity to meet debts as they mature, in the light of its business, assets, cash-flow profile and known future liabilities. This was especially apt for a company in run-off with fixed senior debts and an unusually clear future cash-flow profile.

4. The receivers had to be satisfied, after careful and thorough enquiry, that inability to pay was more likely than not. A test requiring the contrary prospect to be merely fanciful imposed an unjustified and excessively high threshold. On the assumed facts, the likely forced-sale discounts made a later shortfall more probable than payment of all senior debts in full and on time.

5. Although unnecessary to the disposition, the court also addressed the receivers’ duties if no insolvency event were determined. Clause 10.2(a) required them to maximise the prospect of timely payment in full of all senior debts. It did not authorise a transaction which converted probable timely payment of all senior debts into probable default. Under the alternative construction advanced by Party A, where a transaction improved one aspect of that objective but harmed another, the receivers would have to exercise their judgment in the interests of senior creditors as a whole, without mechanically preferring early-maturing debt.

6. Permission to appeal was granted urgently. Pending any appeal, the receivers were restrained from completing the proposed portfolio transaction, but were otherwise free to act in the light of the judgment.

High Court (Chancery Division): This was a first-instance application for directions. It followed an earlier directions application concerning the payment priority under the trust deed; that earlier decision had not been appealed. In this judgment, the court granted Party A permission to appeal on an expedited timetable.