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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

Guildhall Chambers , 19 MAY 2014

Re Casa Estates; Carman v Bucci [2014] EWCA Civ 383; [2014] All ER (D) 33 (Apr); [2014] BPIR 523

Re Casa Estates; Carman v Bucci [2014] EWCA Civ 383; [2014] All ER (D) 33 (Apr); [2014] BPIR 523

(Court of Appeal, Sullivan, McFarlane and Lewison LJJ, 03 April 2014)

A company which could only pay its debts as they fell due by going deeper and deeper into long term debt was insolvent

In an action under s 238 of the Insolvency Act, Mrs. Bucci, company secretary and wife of the director, sought to rebut the presumption of insolvency in s 240(2) that at the time of the payments to her, Casa Estates Limited (‘CEL’) was unable to pay its debts as they fell due.

CEL introduced property investors to Dubai, through Casa Dubai Ltd (‘CDL’) in Dubai. It appeared that CEL paid CDL a monthly retainer of £10,000 and CDL agreed to pay CEL 6% commission on sales. CEL passed investors’ moneys to CDL who was in turn to pass them to the developer. CDL set off the sums it was due to pay CEL against the investors’ money it was to receive from CEL and would pay the withheld money to the developers in Dubai, with CEL transmitting any shortfall in payments due to developers. This meant that money only flowed from CEL to CDL and not vice versa, and no profits were remitted from CDL back to CEL.

CEL did not maintain a client account, but mixed depositor’s monies with its own. Its accounting systems did not enable depositor’s monies to be accurately identified. When CEL received customer deposits it had an obligation to account to the customer for those deposits, which was a liability to those customers until such time as the deposits were correctly applied towards the purchase of property in Dubai by payment to the developers.

At the time payments were made to Mrs. Bucci, CEL was marginally insolvent on a balance sheet test. CEL had recorded as an asset a loan to another connected company, Gianluca (UK) Lt (GUL), but there was no real prospect of CEL ever recovering this loan since GUL was loss making from the start.

At first instance, HHJ Purle QC held that CEL had been cash flow solvent because there was no suggestion that any creditor had served a statutory demand or obtained a judgment against CEL, there was no creditor pressure and CEL was in fact paying its debts as they fell due. It had no cash flow problems at the time that it made payments to Mrs Bucci, these only arose after the collapse of the Dubai property market in late 2008 and it was not until that point that CEL reached the “Point of no return” (the phrase which had been applied by the Court of Appeal in Eurosail).

The decision was appealed and by the time Warren J gave his decision on appeal the Supreme Court had considered the appeal in Eurosail and held that “the point of no return” test was not the appropriate test (see [2013] UKSC 28). He considered that the continued payment of debts was only possible because new deposits from investors were used to pay old debts, and there was no material upon which it could be said that, if no significant value was attributed to the GUL loan, CEL would be able to meet its liabilities.

On appeal by Mrs Bucci to the Court of Appeal, Lewison LJ (with whom McFarlane LJ an Sullivan LJ agreed) considered the proper test to be applied following Eurosail and Cheyne Finance (paras 27 and 28 ). The cash-flow test and balance sheet test stand side by side and the balance sheet test is not excluded simply because the company is in fact able to pay its debts as they fall due. The two tests are part of a single exercise to determine whether a company is unable to pay its debts.

When applying the cash-flow test it is not enough for the court merely to ask whether the company is for the time being able to pay its debts as they fall due. In an appropriate case it must inquire how it was managing to do so. If a company is only able to pay its debts by borrowing new money (taking deposits from new investors) to pay off old debts, then unless it is able to trade out of insolvency, it is insolvent whether on a cash-flow or balance sheet test. Further, as a trading company CEL was insolvent on a balance sheet basis, as the loan to GUL was of no value. While that in itself may not be a conclusive answer to the question whether CEL was insolvent, it is difficult to see how it could not lead to that conclusion in the case of a trading company unless there was credible evidence that the balance sheet would improve in the near future.

There was no underlying material to substantiate the claim that CDL’s assets exceeded the amount owed by CEL to depositors. The inference was that CEL had used investors’ deposits for its own ends and so was using new deposits to pay old deposits.

Lewison LJ also emphasised that, where the statutory presumption of insolvency applies, if the judge is not in a position upon the evidence to make a finding of solvency, or not in a position to make findings about one or more of the building blocks in the case that the company was solvent, the presumption prevails.

Click here for the transcript Re_Casa_Estates.pdf
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