BL-2022-000438 - [2025] EWHC 2212 (Ch)

Fecha: 22-Ago-2025

Limitation Issue 2: What is the test for insolvency under clause 5(c)?

G.2.

Limitation Issue 2: What is the test for insolvency under clause 5(c)?

83.

Clause 5(c) of the JVA provides: “The PD Loan will automatically be repayable on the sale of the Company the passing of the resolution to wind up the Company the insolvency of the Company or the Company making any arrangement for the benefit of its creditors”.

84.

There is a dispute between the parties as to the meaning of the phrase “the insolvency of the Company”. The JVA provides (at clause 19) that it is “subject to the laws of England”. Prior to trial, there was a dispute between the parties as to whether regard should be had to the law of Cyprus (that being the law of the place of the Company’s incorporation) in considering whether the Company was insolvent pursuant to this clause. The parties agreed at the start of trial that the Court should approach the question as if it was solely a question of English law.

85.

The Claimant argues that:

(1)

the phrase “the insolvency of the Company” refers to the Company being unable to pay its debts, which is one of the grounds on which a company may be wound up by the Court (s.122(f) IA 1986). The Claimant refers to s.123 IA 1986 (headed “Definition of inability to pay debts”) and contends that “insolvency of the Company” means “[the Company] going into a formal insolvency process (such as a liquidation or administration) or, applying the insolvency law of England and Wales, one of the deemed insolvency events in s.123(1) of the Insolvency Act 1986, but not including the balance sheet test of insolvency contained in s.123(2) of the Insolvency Act 1986”.

(2)

for the purposes of the JVA, the basis for insolvency must be linked to a “definable or identifiable event”. He excludes balance sheet insolvency because he contends that it does not refer to a single, identifiable event but involves the Court undertaking an assessment. He says that it is not a sufficiently certain test to apply and would be unworkable.

(3)

The phrase "the insolvency of the Company" is to be construed eiusdem generis with the phrase "[Astriverl making any arrangement for the benefit of the creditors" which clearly refers to a Creditors Voluntary Arrangement i.e. a formal insolvency process.

86.

The Claimant says that the Company was first insolvent when he obtained Judgment against it in November 2012 or alternatively when the villas had all been sold (largely to Black Flamingo) leaving a substantial deficit.

87.

In the event that, contrary to the Claimant’s primary case, a balance sheet insolvency test applies, the Claimant contended at trial that the Company was not balance sheet insolvent until the Company’s financial year ended December 2011 when the Claimant was asked by the Company’s accountant, Mr Timinis, for a letter of comfort that he would not demand repayment of his loan within twelve months. I note that in the Claimant’s Particulars of Claim (paragraph 19), he contends that if the balance sheet insolvency test in s.123(2) IA 1986 applies: “Mr Dunn will contend that at no date prior to December 2010 was the value of [the Company’s] assets less than the amount of its liabilities, taking into account its contingent and prospective liabilities”.

88.

The Defendant contends that:

(1)

The phrase “insolvency of the Company” has a simple meaning. He refers to the dictionary definition of insolvent as “Unable to pay one’s debts or meets one’s liabilities” and refers to Goode on Principles of Corporate Insolvency Law 5th Ed at 4-01 “A company is insolvent when it is unable to pay its debts. The concept is simple”;

(2)

insofar as the Claimant advances an argument based on the eiusdem generis principle that the phrase “insolvency of the Company” should be taken to mean a formal process, such an argument is flawed and is an impermissible attempt to imply an unnecessary additional requirement;

(3)

insolvency processes such as winding up orders, administration orders, and arrangements with creditors typically take place after a company is insolvent. Such a process cannot be a pre-condition for a finding of insolvency.

89.

I agree with the Defendant that the phrase “the insolvency of the Company” was intended to have a simple common-sense meaning in the JVA. Having regard to the context and purpose of the JVA, I note that:

(1)

Mr Dunn was required as funder to provide not only the funding sum specified (originally CYP 330,000 and later CYP 800,000) but also “such reasonable amount as the Company shall acting reasonably require in order to complete the Development” (clause 5(a)(iii)).

(2)

As a matter of construction, the automatic repayment provisions must have the effect of terminating Mr Dunn’s obligation to provide the funding specified (and any additional sums) and instead impose an immediate repayment obligation on the Company.

90.

I do not agree with the Claimant’s argument that the phrase was intended to refer to a formal insolvency process (such as the appointment of an administrator or a liquidator). That would mean that Mr Dunn would be stuck with a funding obligation even after the presentation of a winding-up petition against the Company. (Footnote: ¹)

91.

The Claimant’s submission that the term the “insolvency of the Company” also encapsulates the occasions on which a company is deemed insolvent under s.123(1) IA 1986 sits uneasily with the Claimant’s prior argument that the “insolvency of the Company” relates to formal insolvency process. That is because the matters of deemed insolvency in s.123(1) are usually precursors to the commencement of insolvency proceedings and generally occur well in advance of any formal insolvency process (such as an administration or liquidation order).

92.

I also disagree with the Claimant’s submission that a test focussed on the assets and liabilities of a company is insufficiently certain and workable to apply under the JVA. On the contrary, I think that there is good reason to reach the view that the balance sheet insolvency test would apply under clause 5(c) of the JVA:

(1)

The whole purpose of the joint venture was to develop and sell the villas.

(2)

It seems to me a matter of common sense that if the expected sale price of the villas was clearly insufficient to discharge the actual and contingent liabilities of the company then the company would be insolvent.

(3)

If that were not the case then Mr Dunn would have been contractually obliged under the JVA to continue lending if so required by the Company under clause 5(a), irrespective of whether there was any prospect of recovering that additional lending.

93.

As to the Claimant’s suggestion that the balance sheet test is insufficiently certain, that is undermined by the fact that the test is nonetheless applied by the Courts under s.123(2). In my view, in the context of the JVA, the fact that the test can be difficult to apply is a point which goes to the burden of proof not the application of the test. As Lord Walker noted in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc and others [2013] UKSC 28, [2013] 1 WLR 1408, the balance sheet test is a “very far from an exact test” and ultimately “the burden of proof must be on the party which asserts balance-sheet insolvency”.

94.

If in considering whether “it has been established that, looking at the company’s assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to meet those liabilities”, it was unclear whether the assets would be reasonably expected to meet the liabilities then the person asserting balance sheet insolvency would be unable to discharge the burden on them.

95.

In the present case, the question is whether the Defendant can discharge the burden on him to establish that the Company was insolvent according to the balance sheet test by 10 March 2010 (at the latest). In my view, he has, as I explain in Section G.3 below.