Contingent assets are excluded from the balance sheet test

In the recent case of Evans v Jones [2016] EWCA Civ 660 (07 July 2016) the Court of Appeal held that contingent assets are not to be taken into account when assessing insolvency in relation to a preference action.

In this case, the directors’ loans were repaid by the company prior to its liquidation. It was accepted that the payments were preferential, however, a preference cannot be set aside unless the company was, at the time the preference was given, unable to pay its debts or became unable as a consequence.

The Court of Appeal had to determine whether a £75,000 dividend, paid unlawfully to its shareholders and accordingly repayable, was to be treated as an asset. The unlawful dividend was theoretically owed when the preferences were made and, if treated as an asset, meant the company was solvent.

The court held that the company’s claim for repayment of the dividend was at the time a contingent claim and that contingent assets do not form part of the balance sheet test (confirming the approach taken by the High court in Eurosail). Further, it did not accord with commercial reality to treat the unlawful dividend as an asset, a test applied by the Court of Appeal in Eurosail.

The decision is important in confirming that contingent assets are not part of the balance sheet test. It flags up the significance of this test in the context of reviewable transactions and appears to be the first time the courts have considered the effect of an unlawful dividend on a company’s solvency.

For further information about this article or for any insolvency enquiries please contact, Associate Solicitor, Lauren Hartigan-Pritchard on 01905 677051 or lhartiganpritchard@thursfields.co.uk