Inability to pay debts as a ground for insolvency proceedings

Inability to pay debts is one of the two statutory grounds for opening insolvency proceedings under the Commerce Act, the other being over-indebtedness. Article 608(1) defines it as an objective, lasting economic condition in which a trader cannot meet monetary obligations of the kinds specified by law when they fall due. Assessing the solvency of a business requires analysis of its short-term and current liabilities. Short-term liabilities are those already due in full; current liabilities also include the portion of long-term obligations that has fallen or will fall due in the reporting period. The business’s ability to meet these liabilities must be assessed by examining the assets a going concern uses to make payments.

A consistently applied principle is that fixed assets (sometimes called fixed capital) are not used to pay short-term or current debts. They are needed to run the business, and realising them would bring its operations to a halt.

The ratio of current assets, or specified subsets of them, to short-term or current liabilities is central to assessing whether the debtor can meet payments. It gives rise to the general, quick, immediate and absolute liquidity ratios. The main measure in settled case law is the general or current ratio: all current assets divided by short-term liabilities. The other ratios use only one or several categories of current assets rather than all of them.

For insolvency proceedings to be opened, it must also be established that the debtor’s difficulties are lasting and irreversible rather than temporary, or that the trader lacks sufficient assets to cover the liabilities without putting creditors’ interests at risk.

The Supreme Court of Cassation has consistently held that a debtor responding to a petition under Article 625 of the Commerce Act bears the burden of proving either that it has performed its obligation to the petitioner or that it has enough assets to meet its liabilities without jeopardising creditors’ interests. The debtor must rebut the statutory presumption by fully proving the contrary: that it is solvent and can perform its obligations. See the judgments in commercial case No. 219/2008, Commercial Chamber; commercial case No. 1493/1995, Fifth Civil Division; and commercial cases Nos. 169/2006, 443/2004, 512/2004, 730/2004 and 756/2005, First Commercial Division of the Commercial Chamber, among others.

If your case concerns a legal entity’s inability to pay or insolvency proceedings, it is advisable to consult a commercial lawyer.