Inability to pay debts as they fall due
A recent case in the Court of Session has called into question the scope of the "inability to pay debts as they fall due" insolvency test, frequently used by creditors. Typically, a creditor will serve a written demand, specifying a period for payment. In the event of non-payment and in the absence of any dispute, creditors have proceeded to present a winding up petition to Court, sometimes also having a provisional liquidator immediately appointed.
Landlord petitioners Purewal Enterprises Limited presented winding up petitions against two of their tenants; Cathay Loon Fung Limited and Oriental Express (Scotland) Limited. The debts related to rent and insurance. The landlords had previously served irritancy notices on the tenants, and the tenants in turn disputed the notices and obtained interim interdict against any continuation of the irritancy action. The responses by the tenants made it clear though that at least part of the debt was undisputed.
The landlord proceeded to present winding up petitions to Court, arguing that the tenants had failed to pay the undisputed element of the debt, and so were unable to pay their debts as they fell due; satisfying the insolvency test set out in the Insolvency Act 1986. In the petitions, statements were made about what happened following service of the irritancy notices. In response to the notices, the tenant companies in one instance sent an email with a letter attachment purporting to include bank drafts covering the undisputed element of the debt, and in another sent a letter referring to an enclosed bank draft, but with no enclosure evident. The appointment of provisional liquidators was sought and granted.
Answers were lodged by the tenant companies, and it transpired that the tenants' director had met the landlord following service of the pre-irritancy notices and had either tendered copy bank drafts, or originals (this was subject to dispute). There was also dispute as to the landlord's response; according to the tenant the landlord refused to accept the drafts, while the landlord maintained the tenant was advised to take it to the solicitors involved. In any case, payment was not actually made or accepted.
Lord Glennie considered that the absence of statements in the petitions about this meeting constituted "a material and serious non-disclosure", and that had he known about it, he would not have granted the appointment of provisional liquidators. He recalled their appointment. On top of that, Lord Glennie decided that the petitions should be dismissed. He did not consider that the facts necessary to prove that "an inference could be drawn that the companies are unable to pay their debts as they fall due" had been alleged or proved. Lord Glennie took the view that the context of the irritancy dispute explained, though did not justify, the non-payment of the undisputed element of the debt, and that in those circumstances it could not be inferred that the company was unable to pay its debts as they fell due.
The lessons to be learned from this case are that full disclosure of all material circumstances should be set out in any winding up petition, that the full story is relevant in satisfying the "inability to pay debts as they fall due" test, and that in complex situations the existence of an expired demand in respect of an undisputed debt may simply not be enough.
Lord Glennie also ordered the landlord to pay the costs of the tenant companies, and of the provisional liquidators. We suspect this decision may be appealed, and that there will be a further review of the interpretation of the "inability to pay debts as they fall due" test, so watch this space for further commentary on the point.
For further information please contact: Gordon Hollerin