When is a company insolvent? A recent overview of insolvency principles in Westgem Investments Pty Ltd v CBA [2022] WASCA 132
Posted on December 02, 2022
In a recent decision delivered by the Court of Appeal in the Supreme Court of Western Australia, Murphy JA revisited the statutory principles as to when a status of insolvency arises.
In Westgem Investments Pty Ltd v CBA [2022] WASCA 132, the Applicant and other related entities brought various proceedings against the financiers of their property development (later succeeded by CBA) to unwind transactions that were entered into between the parties on the grounds that those transactions were voidable being they were uncommercial and a consequence of misleading and deceptive and unconscionable conduct. In 2020, the Supreme Court of Western Australia held in favour of the financiers and on appeal, the Court of Appeal dismissed the action on all grounds holding once again in favour of the financiers.
In his Judgment, Justice Murphy distilled key principles that derive from section 95A of the Corporations Act 2001 (Cth) which defines solvency and insolvency.
Section 95A provides:
- 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.
- A person who is not solvent is insolvent.
Present Tense
By reference to observations made by Basten JA in Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471 at [56], His Honour confirmed that whether a person is able to pay its debts refers to an ability to do so and this can be ascertained over a period of time rather than by reference to a fixed state of affairs at a given time. A company’s balance sheet can be used to provide contextual evidence in addition to the cashflow test of insolvency to answer cashflow questions.
Forward Looking
Justice Murphy enunciated that the phrase ‘as and when they become due and payable’ necessarily involves a degree of ‘forward looking’. The question of how far entirely depends upon the specific circumstances of each case.
The ability to pay debts as and when they become due and payable is a question of fact to be decided as a matter of commercial reality considering the circumstances as a whole. For companies, this involves consideration of the entity’s entire financial position, ‘…including its activities, assets, liabilities, cash and money which it could procure by sale or on the security of assets, and its ability to obtain financial assistance…’.
The consideration of ‘commercial reality’ in this context requires consideration of both a company’s legal rights and obligations, and the likelihood of it having accessible funds, including from those with which there is no formal agreement.[1]
Hindsight
This case highlights that a Court may consider facts available retrospectively if they clarify the state of affairs at the given time and what was, or ought to have been, known about the state of affairs.
‘Temporary Lack of Liquidity’ vs ‘Endemic Shortage’
The former must be distinguished from the latter by reference to the quantity of cash and other liquid assets as against the number of debts due and payable at present and in the immediate future.[2]
Crucial to the determination of whether lack of liquidity is temporary is consideration of the debts that will become due and payable during the period in which liquidity has been reestablished. In this respect, Justice Murphy articulated the following as indicative of a company’s solvency:
- Whether a secured creditor is willing to continue lending despite financial difficulties; and
- Whether unsecured borrowings can be accessed during periods of financial difficulties.
His Honour notes that these factors are to be considered by reference to the ‘commercial reality’ and reiterates that the non-payment of a debt is not sufficient to establish the inability to pay a debt.
Onus is on the Liquidator
Justice Murphy made clear that the onus of proving insolvency ultimately rests on the Liquidator.
Statutory Considerations
Importantly, Justice Murphy held that the operation of certain statutes may preclude a finding that a debt has not become due and payable. He further held that a ‘mere delay’ by creditors in commencing an action does not exclude the debt as being due and payable pursuant to section 95.
Contractual Considerations
The Court may have regard to the conduct of creditors in their enforcement of credit agreements in this context. Agreements between a creditor and company whereby a creditor agrees to forbear their right to sue are sufficient to preclude a finding that a debt is due and payable and are relevant considerations as to a company’s solvency status.
The comments of Justice Murphy in this case are a timely refresher of the factors relevant when establishing the date of insolvency.
If you are an insolvency practitioner, or the controller of an entity facing these issues and require our assistance, please contact one of our insolvency specialists.
[1] See Chan v First Strategic Development Corporation (in liq) [2015] QCA 28, [40]-[41] (Morrison JA).
[2] See Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321, 328; Sutherland as Joint Liquidators of Australian Coal Technology v Hanson Construction Materials Pty Ltd (2009) 254 ALR 650.