A recent NSWSC decision, In the matter of Sails Corp Pty Ltd [2021], confirmed the problematic task of rebutting a presumption of insolvency. In this matter, the defendant’s presumed insolvency arose from an unsatisfied Creditor’s Statutory Demand. Therefore, the defendant bore the onus of rebutting this presumption and establishing solvency. 


Establishing Solvency:

Establishing solvency requires more than a bald assertion. 

Instead, under s 95A of the Corporations Act 2001 (Cth), solvency only arises where a company is able to pay its debts as and when they fall due. This requires leading the ‘fullest and best’ evidence.

In theory, this seems simple enough. However, in practice, it can prove more complex. 


The Defendant’s Arguments:

The defendant alleged that the company was solvent as it did not trade and had over $1 million in its bank account. Further, the defendant personally pledged to provide additional funding if needed.  

However, the fundamental problem with the defendant’s case was the evidence, which, by any account, was inadequate:

  • The defendant failed to tender any financial records, including a current balance sheet. Without this, the court could not be convinced of the company’s solvency. [1] 
  • The bank statement was determinative of nothing. The defendant did not give evidence on the origin of this cash amount. Therefore, it was open to the court to conclude that this was not the company’s cash but rather a gift or a loan.
  • The defendant promise of personal funding did not establish solvency. Such a promise will only establish solvency where it is objectively likely that the director’s financial support will continue, occurring only where the company can compel the director to pay. [2] This did not occur in this case.

Unsurprisingly, the defendant failed to establish solvency.


Key Takeaways:

This case demonstrates a common pitfall that companies presumed insolvent fall into. They avoid the short-term costs of hiring professional accountants and instead lead piecemeal evidence, including one-page bank statements to establish solvency. 

This is ill-advised. 

Solvency is a forensic inquiry in which the courts are discerning and, therefore, unlikely to be persuaded by incomplete financial statements and illusive director promises of funding. Accordingly, it may be wiser to incur the short-term costs of procuring comprehensive financial analysis than risk the long-term repercussions of being wound-up. 

 

**Assisted by: Kayla Cook***

[1] See Barrett J in TQM Design and Construct Pty Ltd v Golden Plantation Pty Ltd [2011].
[2] Quin v Vlahos [2021]