CFM33194 - Loan relationships: the matters and computational rules: amounts not brought into account: debt releases: corporate rescue exemption: material risk
This guidance is applicable to certain events that take place on or after 1 January 2015.
CTA09/S323(A1)
Material risk of the company being unable to pay its debts
As explained in CFM33193, the phrase 바카라 사이트˜unable to pay its debts바카라 사이트™ is based on section 123 of the Insolvency Act 1986. The Insolvency Act definition is based on the evidence a creditor would need to present to a court to begin winding up proceedings. It is not necessary for such proceedings to have begun in order for the exemption in CTA09/S322(5B) to apply. Nor does it mean that a debtor can merely claim the exemption just because any creditor could at any time commence court proceedings.
Case law on insolvency (for example, Colt Telecom [2002] EWHC 2815, and BNY Corporate Trustee Services Ltd [2013] UKSC 28) emphasises that a court will require more than a 바카라 사이트˜modest threshold of probability바카라 사이트™ before agreeing to insolvency proceedings.
The test of a company being 바카라 사이트˜unable to pay its debts바카라 사이트™ within the meaning of CTA09/S323(A1) (like sections 123(1)(e) and (2) of the Insolvency Act 1986) contains what are often called a 바카라 사이트˜cash flow바카라 사이트™ test and a 바카라 사이트˜balance sheet바카라 사이트™ test.
CTA09/S323(A1)(a): unable to pay its debts as they fall due
Lord Walker in BNY confirmed that 바카라 사이트˜the 바카라 사이트˜cash flow바카라 사이트™ test [in section 123(1)(e) of the Insolvency Act 1986] is concerned not simply with the petitioner바카라 사이트™s own presently-due debt, nor only with other presently-due debt owed by the company, but also with debts falling due from time to time in the reasonably near future. What is the reasonably near future, for this purpose, will depend on all the circumstances, but especially on the nature of the company바카라 사이트™s business.바카라 사이트™
CTA09/S323(A1)(b): the value of the company바카라 사이트™s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities
In BNY, Toulson LJ said: 바카라 사이트˜In practical terms it would be rather extraordinary if section 123(2) was satisfied every time a company바카라 사이트™s liabilities exceeded the value of its assets. Many companies which are solvent and successful, and many companies early on in their lives, would be deemed unable to pay their debts if this was the meaning of section 123(2). Essentially, section 123(2) requires the court to make a judgment whether it has been established that, looking at the company바카라 사이트™s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities. If so, it will be deemed insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish.바카라 사이트™
Under the so-called 바카라 사이트˜balance sheet바카라 사이트™ test, therefore, the court must be satisfied that there will 바카라 사이트˜eventually be a deficiency바카라 사이트™ (Lord Walker in BNY).
For the exemption to apply, then, there must be a 바카라 사이트˜real prospect of insolvency바카라 사이트™ as an insolvency court would understand it, within the next 12 months. It will not be enough for a company to claim the benefit of the exemption on the basis of temporary cash flow difficulties for which it is seeking bridging finance or which it meets by selling assets. Nor is it sufficient that there is a mere possibility that the company may (like any business) run into problems in some years바카라 사이트™ time.
See CFM33195 for more on the 12 month period.