In the recent case of Henclo Investments Pty Ltd v. MSB Capital Holdings Pty Ltd  VSC 775, a wind up application was refused by the Supreme Court of Victoria on 25 November 2020 on the basis that an outstanding debt alone was found to be insufficient to show insolvency.
Henclo Investments Pty Ltd (Henclo) had applied for the Defendant company to be wound up after it failed to pay an outstanding judgment debt. The debt had been the subject of a letter of demand pursuant to sections 459A and 459P of the Corporations Act 2001 (Cth) (Act) (not a statutory demand pursuant to s 459C(2)(a)). As such, it could not rely on the ‘presumption’ of insolvency and had to prove the defendant’s ‘actual insolvency’.
The key issue in the proceeding was whether Henclo had established that the Defendant was ‘actually insolvent’ such that it should be wound up.
Section 9 of the Act defines the terms “solvent” and “insolvent” by reference to s 95A of the Act. Section 95A of the Act provides:
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
Whilst Henclo had obtained a judgment debt against the Defendant (even where the debt was significant and undisputed), the court nevertheless found that the presence of such a debt was not conclusive. Rather, the court found that it was merely a factor which may be taken into account when assessing the solvency of a company.
Given there was insufficient evidence to lead the court to infer that the Defendant was ‘actually insolvent’, the court dismissed Henclo’s application to wind up the Defendant.
Accordingly, care should be taken as to the option of issuing a statutory demand to secure the benefit of the presumption of insolvency (as opposed to simply winding up the company on the back of a court judgment debt or letter). If however a statutory demand is not issued (or is not possible to issue), you will need to show more than the mere existence of an undisputed unpaid debt (or the financial records of a debtor’s financial position) to prove insolvency – it will be a matter of showing the debtor is not merely refusing to meet its liabilities, but rather that it is unable to meet them.
If you have any questions on the above information or you require assistance, please do not hesitate to contact our Commercial Team at Burke & Associates Lawyers. We would welcome the opportunity to assist you.