Реферат: Inability to pay debts (UK and Maltese law)
Реферат: Inability to pay debts (UK and Maltese law)
Contents
Introduction
Cash flow test
and balance sheet test
The reasons of
not having a single test
The definition
and treatment of the debts and liabilities under the both tests
Bibliography
Introduction
The company’s inability
to pay debts is the most common ground for the winding up of companies and,
by definition, all-encompassing in the case of insolvent companies.
Under Maltese
law section 214 (a) (ii) of Company Act 1995 states that the company may be
dissolved and wound up by the court in case of the company is unable to pay its
debts. The definition of this ground is to be found in sec. 214 (5) of Company
Act. Based on it the inability to pay debts of the company can be proved by the
way of two alternative tests: cash flow test and balance sheet test.
These tests have different purposes. In simple words, cash flow test is in
general about the debts which have already become due; balance sheet test is
about the liabilities, e.g. contingent and prospective debts.
Before the
consideration of these tests I would like to mention that even though Maltese
Insolvency law is mainly based on UK Insolvency law, there are some differences
between Maltese law and UK law in this question. The first difference is
that under UK law the ground inability to pay debts can be applied in four
scenarios, while in Maltese law there are only two of them. UK law describes
the inability to pay debts in Insolvency Act 1986[1]. Also there is a
difference between UK and Maltese cash flow test, it will be considered later
on in this paper.
Cash
flow test and balance sheet test
Cash flow
test is
more for the lawyers because you do not have to work with accounting documents
of the company. All you need is the state of a fact that there is a debt unpaid
for the period of 24 weeks after the issue of executive warrant on the basis of
executive title.
The scheme of
cash flow test can be represented as followed. There are two companies A and B.
A owns B some money and does not pay it when it is due. B starts the case in a
court against A and wins it, e.g. court issues a judgment in favour of B. A judgment
is an executive title[2].
In perfect situation A must pay its debts to B on the basis of this judgment.
But usually companies do not do it. Then a judgment creditor is appointed. The
judgment creditor has a power to issue an executive warrant[3]. Usually it can be in
three copies to the different banks where A has its accounts. The banks, in
their turn, freeze the accounts of A and send the debt money on the accounts of
B. If this scenario does not work, then B has to wait 24 weeks from the moment
of issue the executive warrant and after can start the winding up proceedings
against A.
Under UK law
the cash flow test is different[4].
The company is deemed to be unable to pay its debts if a creditor to whom the
company owes more then £750 immediately payable has delivered to it at
its registered office a notice and the company has for three weeks thereafter
neglected to pay the debt. Moreover, these twenty-one days should be clear. If
the creditor presents the petition for winding up before the expiration of the
time, he will not be able to rely on the company’s failure to comply with his
demand for payment in the notice as proof of its inability to pay debts[5]. Above all, it must be
shown that the company has neglected to pay the debt demanded. If the company,
in good faith, disputes its liabilities, it can not be said to have neglected
to pay the sum demanded[6].
Observing the
authors, we find Sealy stating that cash flow test is the most common reason
for making the winding up petition. Another author, Pennington, makes the
definition of cash flow test very simple. Everything reduces to the presence of
current cash. If a company does not have a cash to pay to a creditor, it is
deemed to be insolvent.
Balance
sheet test
is more for the accountants. The balance sheet test for insolvency was first
introduced in UK law in Insolvency Act 1985[7].
Balance sheet test will is to be satisfied if the company is unable to pay its
debts on prospective and contingent liabilities. Maltese legislation endorsed
balance sheet test. It is described under Maltese law in section 214 (5) (b) of
Company Act 1995, and under UK law in section 123 (2) of Insolvency Act 1986.
Balance sheet
test is a “red light” for the potential creditors. This solvency is very
important for the creditors who are in a position to invest their money in a
company. Usually, balance sheet test is more preferable than cash flow test
because the creditors are more protected with it by giving them an opportunity
to take into consideration future liabilities of the company and not only its
present financial position. In other words, this test is much fair both to the
company and the creditors. So, this test is all about the future possible
liabilities, and the circumstances are varied depending on the particular case.
The
reasons of not having a single test
These two
tests are alternative. The test is to be chosen by a person who brings the
application to the court. The reasons of having not a single test are
following:
1.
The
company may fail cash flow test but satisfies balance sheet test (e.g. be
balance sheet insolvent), and it still may be liquidated. And reverse
situation: Prof. Prentice shows that the company may be balance sheet solvent
but cash flow insolvent. As an example we can consider the Cornhill
Insurance case[8].
The insurance company owned some amount of money to a certain person. For some
reason it decided not to pay it. According to contingent and prospective
liabilities it was solvent, but according to the fact of not paying the debt it
was insolvent. In conclusion court stated the inability to pay debts.
2.
It is
much easier to state the fact of satisfaction of cash flow test than balance
sheet test because the latter one needs the access to information (which not
everybody will be glad to give on request) and special expert knowledge to read
and understand that information. Besides, it is not so easy for a person to
construct a true and fair value of the company. On the other hand, there can be
some problems of accuracy connected with cash flow test.
3.
The
minus of having cash flow test on its own can be illustrated with the following
situation. There can be a sole creditor having a small claim against the
company. That creditor because of some reason decided to request the winding up
of the company. Therefore the remedy is excessive and not proportional to the
claim. The main interest and purpose of the Insolvency law is the protection of
the creditors. The creditors can not be sufficiently protected with cash flow
test on its own. Prof. Goode states that balance sheet test adds more
protection to the companies, while cash flow test makes individuals more
protected.
The
treatment of the debts and liabilities under the both tests
The
definitions of debts and liabilities are to be found in UK Insolvency Act 1986.
According to it,
“’debt’ is
to be construed in accordance with following: the bankrupt is deemed to become
a subject to that liability [a bankruptcy debt] by reason of an obligation
incurred at the time when the cause of action accrued”[9].
“’liability’
means a liability to pay money or money’s worth, including any liability to
under an enactment, any liability for breach of trust, any liability in
contract, tort or bailment and any liability arising out of an obligation to
make restitution”[10].
In the
Insolvency Rules 1986 we can find following:
“’debt’ means
any of the following –
(a)
any
debt or liability to which the company is subject at the date on which it goes
into liquidation;
(b)
any
debts or liability to which the company may become subject after that date by
reason of any obligation incurred before that date”[11].
The very
important provision is the rule 13.12 (3). It states that –
“ for the
purposes of references in any provision of the Act [Insolvency Act 1986] or the
Rules, it is immaterial whether the debt or liability is present or future,
whether it is certain or contingent, or whether its amount is fixed or
liquidated, or is capable of being ascertained by fixed rules or as a matter of
opinion”.
The term
“liability” is wider than term “debt”. Under the alternative tests debts and
liabilities are treated differently.
Under cash
flow test, the company is unable to pay its debts if it can not pay them as
they fall due out of cash or very liquid assets, and it can not pay all its
debts over a lengthy period of time by a steady realization of all its assets.
But on the other hand, cash flow test does not deal at all with the debts and
other liabilities of the company which have not been accrued due, or which are
liabilities for not liquidated damages.
In Re
Capital Annuities Ltd[12],
it was held that inability to pay debts occurs where company’s present,
contingent and prospective liabilities exceed the present value of its assets.
So, under balance sheet test, the company is unable to pay its debts if the value
of its assets is less that the amount of its liabilities. Before 1871 the court
could not take account of prospective and contingent liabilities in making this
assessment. Since those liabilities are very important for the insurance
companies, in that year it was provided that account should be taken of such
liabilities of determining the solvency of those companies[13]. Later on, in 1907
these liabilities were made applicable to assessing the solvency of all other
companies[14]
Maltese law fails to define what contingent and prospective liabilities are.
That is why we have to refer to UK case law. One of the most important cases in
insolvency is Byblos Bank SAL v Al-Khudhairy [1987]. Here the court
outlines certain guidelines which will be considered when assuming whether or
not balance sheet has been satisfied. Firstly, the court will take into
consideration the fact that the company has ceased to carry out its business.
If it definitely happens, than court can apply balance sheet test as possible
technique. Secondly, the court has to draw the distinction between accrued
liabilities and those which may accrue in future connected to transactions already
entered to. It should be done because accrued liabilities are definite debts.
The liabilities which may accrue are dispute debts: if it takes very long
period of time to repay these liabilities that they can be taken into
consideration when applying balance sheet test. Also court held that no assets
should be taken into consideration in balance sheet test if they may accrue in
future. As to contingent and prospective liabilities, in the Byblos Bank
case express provision were maid to include those liabilities in determining
the company’s solvency.
In the other
case, Taylor’s Industrial Flooring Ltd v Malta & H Plant Hire
(Manchester) Ltd[15]
court held that the proof by a creditor that his debts has not being paid is
the prima facie evidence that the company is insolvent if the company gives no
reason for not paying it.
In Malta the
judgment concerning balance sheet test is Axel Johnson International
AB vs. Aluminum Extrusions Ltd (28/05/2003). In this case the court:
1)
held
considerable discretion and determined the dissolution and winding up of the
company;
2)
summed
up its role within this context as debts inquiring to the general situation of
the company: either determines that the winding order should be issued, or that
the company will be able to operate in the future and will be in position to
pay its debts;
3)
took
into consideration contingent and prospective liabilities when applying balance
sheet test;
4)
declared
the defendant company to be insolvent as its liabilities are far exceed its
assets, and ordered the dissolution and winding up of the company on the basis
of Article 214 (2) (a) (ii) – inability to pay debts.
In conclusion,
I would like to make it clear one more time. Cash flow tests deals only with debts
that have already become due. Balance sheet test deals with future liabilities
and future payments as well as available now assets. Balance sheet test take
into consideration prospective and contingent liabilities.
Bibliography
1. Company Act 1995, cap. 386
Laws of Malta.
2. Gower, L.C.B. “Gower’s
Principles of Modern Company Law”. – 6th ed. /by Paul L.
Davies, Sweet and Maxwell, 1997.
3. Leonard Sedgwick Sealy,
David Milman “Annotated Guide to the 1986 Insolvency Legislation”, CCH Editions
Limited, 1991 – 3rd ed.
4. Michael Forde “The Law
of Company Insolvency”, The Round Hall Press, Dublin, 1993.
5. Prof. Goode “Principles
of Corporate Insolvency Law”
6. Pennington, Robert R. “Pennington’s
Corporate Insolvency Law”, Butterworth, 1991.
7. UK law on line – www.opsi.gov.uk
8. UK legislation – www.infolaw.co.uk/lawfinder
References
1. Re Catholic Publishing and
Bookselling Co Ltd (1864).
2. Re Fitness Centre (South
East) Ltd [1986].
3. Cornhill Insurance plc v
Improvement Services Ltd [1986].
4. Re Capital Annuities Ltd [1979].
5. Byblos Bank SAL v
Al-Khudhairy [1987].
6. Taylor’s Industrial Flooring
Ltd v Malta & H Plant Hire (Manchester) Ltd [1990].
7. Axel Johnson International
AB vs. Aluminum Extrusions Ltd (28/05/2003).
[1]
Section 123 (1) (e) is about cash flow test; section 123 (2)
describes balance sheet test.
[2]
Executive title also can be public deed and judicial bills of
L.L.D.
[3]
An executive warrant may be a judicial sale, a warrant of
seizure, a judicial warrant, a warrant in factum or a warrant of ejection.
[4]
Section 123 (1) (a) of Insolvency Act 1986.
[5]
Re Catholic Publishing and Bookselling Co Ltd (1864) 2 De GJ & Sm 116.
[6]
Re Fitness Centre (South East) Ltd [1986] BCLC 518.
[7]
Schedule 6, para 27 (1) (u).
[8]
Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114.
[9]
Sections 385 (1), 382 (2) of Insolvency Act 1986.
[10]
Section 382 (4) of Insolvency Act 1986.
[11]
Rule 13.12 (1) of the Insolvency Rules 1986.
[12]
[1979] 1 WLR 170.
[13]
Section 21 of the Life Assurance Companies Act 1871.
[14]
Section 28 of the Companies Act 1907.
[15]
[1990] BCLC 216, [1990] BCC 44.