LAW

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© John ORR.

TOPIC 8.1

*****‘TAKEAWAYS’***** (key points to be remembered)

Insolvency (meaning of and significance) Receivership & powers and duties of receivers Role of and procedures within Voluntary Administration (VA)

and Deeds of Company Arrangements (DoCA) Link between VA/DoCA and liquidation.

Definition of Insolvency

There are two approaches

Balance Sheet Test Insolvency exists if value of total liabilities exceeds total assets

Cash Flow or Commercial Test Insolvency exists if debtor is unable to pay debts as and when they fall due.

CORPORATIONS ACT 2001 - SECT 95A

Solvency and insolvency (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

…..

Voluntary Administration

Part 5.3A

A process aimed at corporate rescue where an independent person is appointed to

investigate the company for a short period and make a recommendation to a meeting of

creditors as to whether the company should continue - usually under some form of

arrangement (Deed of company Arrangement - DOCA) or if it should be liquidated (wound

up)

…

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What is the voluntary administration process?

………………..

Insolvency – the legal principles

The legal principles on insolvency are given more detail in Tru Floor Service Pty Ltd v Jenkins (No 2)

[2006] FCA 632 where Sundberg J outlined as follows:

43 It is beyond doubt that s 95A mandates a "cash flow" rather than "balance sheet" approach to

determining solvency. Therefore, an excess of current liabilities over current assets is not conclusive of

a company’s insolvency and "cannot be more than a rule of thumb" as to the same: Quick v Stoland Pty

Ltd (1998) 157 ALR 615 at 623 per Emmett J. Further, "[a] temporary lack of liquidity must be

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distinguished from an endemic shortage of working capital whereby liquidity can only be restored by a

successful outcome of business ventures in which the existing working capital has been deployed"…

47 In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621;

(2001) 53 NSWLR 213, Palmer J reviewed at length the authorities on determining solvency. His

distillation thereof (at [54]) bears repeating:

"[T]he following propositions may now be drawn from the authorities:

(i) whether or not a company is insolvent for the purposes of the Corporations Act (Cth), ss

95A, 459B, 588FC or 588G(1)(b), is a question of fact to be ascertained from a consideration

of the company’s financial position taken as a whole ...;

(ii) in considering the company’s financial position as a whole, the Court must have regard to

commercial realities. Commercial realities will be relevant in considering what resources are

available to the company to meet its liabilities as they fall due, whether resources other than

cash are realisable by sale or borrowing upon security, and when such realisations are

achievable ...;

(iii) in assessing whether a company’s position as a whole reveals surmountable temporary

illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have

regard to the commercial reality that, in normal circumstances, creditors will not always

insist on payment strictly in accordance with their terms of trade but that does not result in

the company thereby having a cash or credit resource which can be taken into account in

determining solvency ...;

(iv) the commercial reality that creditors will normally allow some latitude in time for

payment of their debts does not, in itself, warrant a conclusion that the debts are not payable

at the times contractually stipulated and have become debts payable only upon demand ...;

(v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the

time stipulated for payment in the contract unless there is evidence, proving to the Court’s

satisfaction, that:

• there has been an express or implied agreement between the company and the creditor for

an extension of time stipulated for payment; or

• there is a course of conduct between the company and the creditor sufficient to give rise to

an estoppel preventing the creditor from relying upon the stipulated time for payment; or

• there has been a well established and recognised course of conduct in the industry in which

the company operates, or as between the company and its creditors as a body, whereby debts

are payable at a time other than that stipulated in the creditors’ terms of trade or are payable

only on demand ...; [and]

(vi) it is for the party asserting that a company’s contract debts are not payable at the times

contractually stipulated to make good that assertion by satisfactory evidence ...." (I have

omitted the numerous citations.)