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On Appeal from: [2011] EWCA Civ 227

This case concerned the proceedings commenced by the Trustee seeking a determination of whether the difficulties suffered by the issuer of interest-bearing loan notes after the collapse of Lehman Brothers constituted an ‘event of default’ on the basis that it was unable to pay its debts within the meaning of the Insolvency Act 1986, s 123. The appellants, A3 noteholders, argued that the Issuer was not able to pay its debts.

The Supreme Court unanimously dismissed the appeal. The changes in form within s 123 emphasise that the “cash-flow” test is concerned with debts falling due in the reasonably near future and those debts presently due. What is to be regarded as the reasonably near future will depend especially the nature of the company’s business. In the present case, any attempt to apply the “cash-flow” test would have become completely speculative and a comparison of present assets with present and future liabilities of the issuer became the only sensible test. This was the reason for the inclusion of the “balance-sheet”  test in section 123.

The Issuer’s liabilities could be deferred until 2045, and as it is currently paying its debts as they fall due, the issuer’s ability to pay all its debts, present or future, may not be finally determined until much closer to 2045. The terms governing the issue of notes contain several mechanisms to ensure that liabilities in respect of principal can be deferred until that date. That being so, the Court could not be satisfied that there would eventually be an inability on the part of the Issuer to pay its debts.

For judgment, please download: [2013] UKSC 28
For Court’s press summary, please download: Court’s Press Summary
For a non-PDF version of the judgment, please visit: BAILII