01 Sep 2014

Rebutting the presumption of insolvency


4 min

How to give 'fullest and best' and not 'bald assertions'.

Many professional advisors would have experienced meeting with a client about an unpaid statutory demand and a subsequent pending winding up application. The question always being: ‘what can I do about it?’. The majority of the time, unless the client can pay the outstanding amount, the answer will be, nothing. However an interesting defence may be that the company is not, in fact, insolvent.

Forensic accountants are often engaged to conduct an independent review of a company’s financial position and prepare a solvency report to support that defence.

That begs the question – what is required to prove that the company is actually solvent?

Once a company has failed to comply with a statutory demand, it is presumed to be insolvent and therefore bears the onus of proving its solvency (s459C(2) and (3)).

In Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728, a number of principles were ruled in relation to proving solvency:

  • To discharge the onus of proving solvency, a company should ordinarily present the Court with the “fullest and best” evidence of its financial position;
  • Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency, and 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;
  • There is a distinction between solvency and surplus of assets – a company may be at the same time insolvent and wealthy;
  • The adoption of a cash flow test does not mean that the extent of the company’s assets is irrelevant to the enquiry, and credit resources must also be taken into account; and
  • The question of solvency must be assessed at the date of the hearing. This does not mean that future events are to be ignored.

In order to rebut the presumption of insolvency, the company will need to provide considerable evidence to its financial position to the Court. It would be unlikely that the Court will determine that the company is solvent merely by unaudited financial statements or statements from the company’s external accountant or directors attesting to its solvency.

It is important to draw the distinction between a company that is actually solvent and one which merely has an excess of assets over liabilities. Assets that are unable to be converted into cash in a relatively short space of time, do not assist with the argument of solvency.

In ASIC v Plymin, Elliott & Harrison [2003] VSC 123, Mandie J referred to a list of indicators of insolvency. Conversely, these indicators are useful in rebutting the presumption of insolvency:

  • Continuing losses;
  • Liquidity ratio below 1;
  • Overdue Commonwealth and State taxes;
  • Poor relationship with present bank, including the inability to borrow further funds;
  • No access to alternative finance;
  • Inability to raise further equity capital;
  • Suppliers placing company on COD or otherwise demanding special payments before resuming supply;
  • Creditors paid outside trading terms;
  • Issuing of post-dated cheques;
  • Dishonoured cheques;
  • Special arrangements with selected creditors;
  • Solicitors’ letters summons(es), judgements or warrants issued against the company;
  • Payments to creditors in rounded sums which are not reconcilable to specific invoices; and
  • Inability to produce timely and accurate financial information.

While we should not rely on these points exclusively, as they may not take into account specific issues to a company, they are a good guide of the points we need to disprove in order to rebut the presumption of insolvency. And therefore be in a position to provide relevant evidence to the Court to defend a wind up application.

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