Carman v Bucci

For the purposes of transactions at an undervalue, a company may be unable to pay its debts under either the cash-flow test in section 123(1)(e) of the Insolvency Act 1986 or the balance-sheet test in section 123(2). The tests form part of a single assessment and are not rigidly separated. A deficit on the balance sheet raises a prima facie case of insolvency, although the court must consider whether the company can reasonably be expected to meet its liabilities. Present liabilities cannot be ignored merely because directors or shareholders are unlikely to demand payment immediately. Where the transaction is with a connected person, section 240(2) places the burden on that person to rebut the presumption of insolvency. Future profits and continued trading cannot be treated as assets, although evidence of likely future income may be relevant to whether liabilities can reasonably be met.

The appellant liquidator of Casa Estates (UK) Limited sought recovery from the respondent, a connected person, of remuneration, pension contributions, dividends and a tax payment. The first-instance judge held that the payments were transactions at an undervalue under section 238 of the Insolvency Act 1986, but concluded that they were outside the relevant period because the company was not unable to pay its debts within section 123.

The liquidator appealed, challenging the judge’s use of the point-of-no-return test and relying on both cash-flow and balance-sheet insolvency. He also sought to raise a new argument that investor monies were held on Quistclose trusts.

1. Appeal allowed. Each payment was a transaction at an undervalue under section 238 and was made at a relevant time under section 240.
2. The point-of-no-return test applied by the first-instance judge was not the correct test following Eurosail Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] UKSC 28. Section 123(1)(e) and section 123(2) provide two complementary ways of establishing inability to pay debts. The court must assess both cash-flow solvency and whether, allowing properly for prospective and contingent liabilities, the company can reasonably be expected to meet its liabilities.
3. A company with immediate liabilities exceeding its assets has a prima facie case of balance-sheet insolvency. The company may show that it can nevertheless reasonably be expected to meet those liabilities, but the court must examine the evidence. A director’s or shareholder’s decision not to demand repayment may affect cash-flow analysis, but does not improve the balance sheet. If repayment depends on uncertain profits over a substantial period, the evidence must provide a firm foundation rather than speculation.
4. Under section 240(2), because the respondent was connected with the company, the statutory presumption applied. She therefore had to prove that the company was not unable to pay its debts, including both that it could pay debts as they fell due and that its assets were sufficient, taking account of prospective and contingent liabilities.
5. The company’s GUL loan receivable had no significant value. Its liabilities exceeded its assets throughout the material period. Its continuing ability to trade depended on receiving further customer deposits, which generated corresponding liabilities and could not properly be treated as resources available to meet earlier debts. The evidence also disclosed substantial unpaid customer liabilities. The respondent did not rebut the presumption.
6. The proposed Quistclose trust argument was raised too late and was not determined. The judge nevertheless indicated, obiter, that the available evidence tended to support the existence of such a trust, which would have made the cash-flow insolvency case stronger.

• High Court (Chancery Division): appeal from the judgment of HH Judge Purle QC dated 17 December 2012. The appeal was allowed and the payments were held to have been made at a relevant time under section 240.