Insolvency procedures: winding up part 10
The statutory demand is not the only route for proving that a company is insolvent. There are other ways in which it can be established that the company is unable to pay its debts within section 123 of the Insolvency Act 1986 so as to give rise to the jurisdiction to wind up under section 122.
Under section 123(1)(b) if in England and Wales execution or other process issued on a court judgment in favour of a creditor of the company is returned unsatisfied in whole or in part that gives rise to the deemed inability to pay debts. So someone has to have a judgment and then has to seek to execute (through bailiffs etc) judgment and that execution must take place and lead to a shortfall. In a case where the sheriff could not get access to the company's premises the court held that that amounted to a failure to levy execution and was not an unsatisfied execution. In consequence therefore the requirements of the subsection were not satisfied. Of course before one even gets to execution you have to have a judgment. This is therefore of no use to a party to whom the debt is owed which has not yet sued for the debt.
Under section 123(1)(e) the same consequence applies if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. Obviously demands for payment other than statutory demands must be relevant for this purpose, since otherwise one would rely upon subparagraph (a) in any event. This subsection essentially provides for a "cash flow" test of insolvency. So for example it would not be sufficient for a company to say that it had plenty of assets if those assets were not capable of being realised within a reasonable timescale or otherwise borrowed against. It will immediately be obvious that in a credit crunch such as at the present time companies which otherwise would have no difficulty satisfying this test might find themselves in peril because assets which in earlier times would have easily been capable of being sold within a reasonable timescale cannot be sold, and obtaining loans against those assets maybe much more difficult in the prevailing climate. In deciding what the company can do the court will consider not only the present income and cash assets of the company but also what can be obtained by selling assets within a relatively short time or by borrowing money against those assets.
As regards how these matters are proved, there are a number of ways. Admissions can often be relied upon. Sometimes the admission might be that the company did not have enough money to pay the petitioning creditor's debt, on other occasions it might be a comment about the business generally (we cannot pay your debt and there are lots of others in the same boat because the company simply hasn't got the money to pay its debts). Obviously the precise words used in the circumstances will need to be scrutinised. Although oral (spoken) admissions can be relied on, they are much easier to deny than written ones.
The court will often draw an inference of insolvency from action or inaction regarding a particular debt. Thus if the debt is due, it has been invoiced for, it is not disputed and the company doesn't pay that will be treated as evidence of inability to pay. In one case a better company with profits for that year of in excess of £10,000,000 failed to pay a debt for just over £1000 despite repeated requests for payment and without giving any reason for non-payment. The court held that that failure could alone justify an inference that the company was unable to pay its debts. An earlier case was relied upon in which the then Judge uttered the following quotable quote: "Rich men and rich companies who did not pay their debts had only themselves to blame if it were thought that they could not pay them".