Rebutting the Presumption of Insolvency

Rebutting the Presumption of Insolvency – If a company has failed to set aside a statutory demand within twenty one (21) days from the date the statutory demand was served on the company then the Corporations Act 2001 (“the Act”) allows for a presumption that the company is insolvent and the risk that the company could be wound up in liquidation.

At law, a presumption moves the onus to a particular party, in the case of insolvency, the presumption shifts the onus and therefore the burden of proof, to the company to prove solvency.

However, the standard of proof needed in rebutting the presumption of insolvency is more than simply providing a balance sheet to the Court.

It is often the case that a forensic accounting firm will be engaged to conduct an independent audit of the company’s books and business records.

Being wound-up in insolvency can have devastating results for the company and the director(s) of the company!  We advise contacting a dedicated, professional insolvency solicitor for advice and assistance.

Evidence Required Rebutting the Presumption of Insolvency

One of the key cases on this subject of Rebutting the Presumption of Insolvency is Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 where the Federal Court summarised the relevant authorities and said:

1. The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. [1997] FCA 125 per Mansfield J.
2. In order to discharge that onus the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J.
3. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J.
4. There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company’s assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466.
5. The adoption of a cash flow test for solvency does not mean that the extent of the company’s assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J.
6. The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467.
7. It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd.

This summary of authorities has been cited as authority in a number of recent cases including Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371; and Soundwave Festival Pty Limited v Altered State (W.A.) Pty Limited (No 2) [2014] FCA 562 among others.

What is Solvency and Insolvency?

Solvency and insolvency are defined in section 95A of the Act as meaning a company which is unable to pay all its debts as and when they become due and payable.

As mentioned above, a company can be asset rich, but cash poor and be deemed to be insolvent.  Any assets that cannot be liquidated and turned into cash relatively quickly to satisfy creditors may not be assessed when proving solvency to rebut the insolvency presumption.

In ASIC v Plymin, Elliott & Harrison [2003] VSC 123, the Court summarised a list of indicators that may be used to signify that a company may be insolvent, and therefore, the inverse of these may be used to prove that a company is solvent:

“1. Continuing losses. 2. Liquidity ratios below 1. 3. Overdue Commonwealth and State taxes. 4. Poor relationship with present Bank, including inability to borrow further funds. 5. No access to alternative finance. 6. Inability to raise further equity capital. 7. Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply. 8. Creditors unpaid outside trading terms. 9. Issuing of post-dated cheques. 10. Dishonoured cheques. 11. Special arrangements with selected creditors. 12. Solicitors’ letters, summons[es], judgments or warrants issued against the company. 13. Payments to creditors of rounded sums which are not reconcilable to specific invoices. 14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.”

The case is – http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2003/123.html at 386.

Rebutting the Presumption of Insolvency

There are a lot of factors to consider when making an application rebutting the presumption of insolvency under the Act.  These factors may or may not be relevant to your exact situation and it is vital that you get professional help from the beginning.

If you have been served with a claim and statement of claim, or a creditor has been given judgment against you, or you have been served with a statutory demand, it is imperative that you address the pending legal issues as soon as possible to prevent the presumption of insolvency, the potential for an application winding your company up and the long and expensive road to proving that you are solvent.

Being wound-up in insolvency can have devastating results for the company and the director(s) of the company!  We advise contacting a dedicated, professional insolvency solicitor for advice and assistance.