Anticipating Insolvency

Anticipating Insolvency of the Company

Anticipating Insolvency of the Company

Anticipating Insolvency of the Company was considered in paragraphs 477 and 478 of BTI 2014 LLC v Sequana S.A. & Ors [2016] EWHC 1686 (Ch).

Does this help us assess the point at which a company is insolvent? We appear to be left with a situation that it depends on the facts of the case.

Here is paragraph 477:

To say that my house is on the verge of burning down seems to me to describe a much more worrying situation compared to one in which there is a risk which is something more than a remote risk of my house burning down. Similarly, giving the words their natural meaning, a test set at the level of ‘a real (as opposed) to remote risk of insolvency’ would appear to set a much lower threshold than a test set at the level of being ‘on the verge of insolvency’ or of ‘doubtful’ or ‘marginal’ solvency. But I agree with the conclusion of Mr Randall QC in HLC Environmental that the authorities appear to treat these and all the other formulations as different expressions of the same test. Having reviewed the authorities I do not accept that they establish that whenever a company is ‘at risk’ of becoming insolvent at some indefinite point in the future, then the creditors’ interests duty arises unless that risk can be described as ‘remote’. That is not what the cases say and there is no case where, on the facts, the company could not also be accurately described in much more pessimistic terms, as actually insolvent or ‘on the verge of insolvency’, ‘precarious’, ‘in a parlous financial state’ etc.

Here is paragraph 478:

The essence of the test is that the directors ought in their conduct of the company’s business to be anticipating the insolvency of the company because when that occurs, the creditors have a greater claim to the assets of the company than the shareholders. This case is very different from the other cases in which the triggering of the creditors’ interests duty has been considered. AWA’s balance sheet showed no deficit of liabilities over assets and there were no unpaid creditors knocking at AWA’s door. It was not in the downward spiral of accumulating trading losses, with no income and no prospect of any income that is typical of the companies where the duty has been held to have arisen. I agree with the statement of Norris J in Frohlich that the underlying principle is that:
“The acts which a competent director might justifiably undertake in relation to a solvent company may be wholly inappropriate in relation to a company of doubtful solvency where a long term view is unrealistic”. (emphasis added)

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