The Supreme Court has recently confirmed that the courts will adopt "a practical business approach (as against one which is unduly technical)" to the determination of due debts when considering a company's ability to pay its due debts.
In the case, McConnell Dowell Construction Ltd (MCD) notified Polyethylene Pipe Systems Ltd (PPS) that it had a claim against PPS for losses caused by failed welds. PPS put in place a scheme to repay unsecured advances to related companies and one of its directors. MCD appointed a liquidator to PPS and the liquidator sought to set aside the payments.
The main issue was whether the payments were made at a time when PPS was "unable to pay its due debts". Under section 292 of the Companies Act 1993, a transaction is voidable by a liquidator if it is an insolvent transaction and is entered into two years prior to liquidation. A transaction is an 'insolvent transaction' if it was entered into at a time when the company is "unable to pay its due debts" and enables a creditor to receive more than it would be likely to receive in the company's liquidation.
The Court held that an objective assessment of solvency taking a "practical business perspective" is required and that "due debts" encompassed both present and contingent debts, drawing upon Australian and United Kingdom authorities. Future and contingent debts are to be included in the assessment where it is sufficiently certain that those debts will crystallise within a reasonable timeframe.
See the full case here.