Insolvency Act 1986, section 123

Definition of inability to pay debts

Part IV Winding Up of Companies Registered under the Companies Acts

(1)A company is deemed unable to pay its debts—

(a)if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or

(b)if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or

(c)if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or

(d)if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or

(e)if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

(2)A company is also deemed unable to pay its debts 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.

(3)The money sum for the time being specified in subsection (1)(a) is subject to increase or reduction by order under section 416 in Part XV.

Definitions used in section 123 1

the company

2 Section 233B does not apply in relation to a contract for the supply of goods or services to a company (“the company”) where any of paragraphs 3 to 11 applies.

Defined in Sch.4ZZA para.2 · see it in the full Act

Cases considering section 123 151

BTI 2014 LLC v Sequana SA and others

[2022] UKSC 25 · 5 October 2022Defines

The provision supplies the cash-flow or commercial insolvency test. The court considered this a convenient potential measure of insolvency for the creditor-interest rule, while leaving the precise application open (see paras [88]; [120]; [307]-[311]). The provision supplies the balance-sheet insolvency test, including contingent and prospective liabilities. The court treated it as a potentially appropriate measure for the creditor-interest rule, subject to contextual application (see paras [88]; [120]; [307]-[311]).

BNY Corporate Trustee Services Limited and others v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others

[2013] UKSC 28 · 9 May 2013Interprets

Interpreted as containing related cash-flow and balance-sheet inquiries. The 1985 reforms made little significant substantive change but clarified the temporal reach and practical interaction of the tests. (see paras [32]-[37]) The first four paragraphs are true deeming provisions, while paragraph (e) requires a factual inquiry into the company’s general ability to pay debts as they fall due. (see paras [24]-[25]) These are true deeming provisions. Proof of the specified statutory-demand or execution default establishes jurisdiction even where the company is factually able to pay its debts. (see para [24]) The provision examines all debts falling due presently and in the reasonably near future. The relevant future period depends on all the circumstances, especially the nature of the company’s business. (see paras [25]; [34]; [37]) The subsection requires a fact-sensitive comparison of present assets with present and future liabilities, allowing for contingencies and deferment. It is not a mechanical comparison of face values or a separate “point of no return” test. The asserting party bears the burden of proof. (see paras [37]; [42]; [48]-[49])

Annette Doran & Anor v County Rentals Limited t/a Hunters

[2022] EWCA Civ 1376 · 24 October 2022Interprets

The court treated the grounds in section 123(1) as substantive statutory grounds which had to be engaged before Schedule 10’s coronavirus test could operate. (see paras [19]; [35]-[39]) The court applied the inability-to-pay test by assessing all relevant evidence rather than treating non-payment of the alleged debt as conclusive. Lack of demand, the company’s belief about payment and possible mistake weakened the proposed inference. (see paras [13]-[14]; [44]-[50]) The provision was included among the statutory grounds to which paragraph 5 of Schedule 10 applied. The appeal itself concerned the section 123(1)(e) ground. (see para [19])

131 more judgments, and what each says about section 123, are in the case-law panel in the full Act.

Amendments and notes

2 notes from legislation.gov.uk

Modifications

  1. C326S. 123 applied (with modifications) (1.12.1994) by S.I. 1994/2421, art. 8, Sch. 4 Pt. II para. 7(a)
  2. C327S. 123 applied (17.2.2009 for certain purposes, otherwise 21.2.2009) by Banking Act 2009 (c. 1), ss. 166(3), 263(1)(2) (with s. 247); S.I. 2009/296, arts. 2, 3, Sch. para. 3