Bucci v Carman (Liquidator of Casa Estates (UK) Limited)

A company may be insolvent although it is currently paying its debts as they fall due. The cash-flow and balance-sheet tests under section 123 of the Insolvency Act 1986 stand side by side. A commercial assessment must consider the reasonably near future and, where appropriate, how the company is obtaining the money used to pay its debts.

The balance-sheet test is evaluative rather than mechanical. The court must consider whether, after proper allowance for prospective and contingent liabilities, the company can reasonably be expected to meet its liabilities. Where insolvency is statutorily presumed, an inability to make the findings needed to establish solvency leaves that presumption in place.

The liquidator of Casa Estates (UK) Ltd sought to recover payments made to the appellant as transactions at an undervalue. Because she was connected with the company, section 240(2) of the Insolvency Act 1986 presumed that the company was insolvent when the payments were made unless she proved otherwise.

HH Judge Purle QC found that the presumption had been rebutted. Warren J reversed that conclusion in [2013] EWHC 2371 (Ch), holding that the company had been unable to pay its debts. The appellant challenged both the applicable approach to insolvency and the High Court's entitlement to substitute its own assessment. The central issues were how the cash-flow and balance-sheet tests interact and when an intermediate appellate court may apply the correct test for itself.

1. Appeal dismissed. The cash-flow and balance-sheet tests in sections 123(1)(e) and 123(2) of the Insolvency Act 1986 stand side by side. The balance-sheet test is not excluded merely because a company is currently paying its debts as they fall due. BNY Corporate Trustee Services Ltd v Eurosail-UK-2007-3BL plc [2013] UKSC 28 and Re Cheyne Finance plc (No 2) [2007] EWHC 2402 (Ch) established that both provisions form part of the inquiry into whether a company is unable to pay its debts.
2. The cash-flow inquiry is commercial, flexible and fact-sensitive. It extends into the reasonably near future. It is insufficient merely to establish that debts are presently being paid. In an appropriate case, the court must examine how the company is financing those payments. A company which pays old debts by incurring accumulating liabilities through new deposits may be commercially insolvent despite its continued payment of creditors.
3. The balance-sheet inquiry is not a mechanical comparison of accounting figures and does not employ a “point of no return” test. The court must assess the company's assets, make proper allowance for prospective and contingent liabilities, and decide whether the company can reasonably be expected to meet those liabilities. For a trading company whose liabilities exceed its assets, that conclusion will ordinarily follow unless credible evidence indicates that its balance sheet will improve in the near future.
4. The trial judge had applied the superseded “point of no return” approach and had stopped the cash-flow inquiry too early. He failed to address evidence that investor deposits were being used to pay existing debts. Once an appellate court concludes that the lower court applied the wrong legal test, it may apply the correct test itself. Warren J was entitled to do so and to find that the appellant had not rebutted the presumption of cash-flow insolvency.
5. A statutory presumption supplies a provisional conclusion which contrary evidence must displace. Where the court cannot make a finding of solvency, or cannot find the necessary factual building blocks of solvency, the presumption remains operative. Warren J's inability to make findings favourable to the appellant on some matters therefore did not undermine his conclusion.

McFarlane and Sullivan LJJ agreed with Lewison LJ.

1. Court of Appeal (Civil Division): The appeal was dismissed unanimously. The court upheld Warren J's conclusion that the statutory presumption of insolvency had not been rebutted.
2. High Court, Chancery Division: In [2013] EWHC 2371 (Ch), Warren J reversed the trial judge's assessment and held that the appellant had not rebutted the presumption that the company was insolvent when the payments were made.
3. Companies Court: HH Judge Purle QC had found that the appellant discharged the burden of rebutting the statutory presumption of insolvency.