The Supreme Court of Queensland decision of First Strategic Corporation Limited (In Liq) and Anor v Chan and Ors  QSC 60 gives insolvency practitioners guidance as to what consideration can be taken into account when assessing the solvency of a company by the means and preparedness of someone to support the company.
The proceeding was an action brought by the liquidator of First Strategic Development Corporation (FSD) which sought the recovery of monies which were debts incurred by FSD when the liquidators allege FSD was insolvent. In this decision, the solvency of the company hinged not on the means of Mr Chan but rather the preparedness of Mr Chan to support FSD.
To the extent that the Company was solvent when incurring the relevant debts, the directors would not be liable for debts incurred at the relevant times.
FSD was incorporated for the purposes of mineral exploration of a tenement adjacent to an already established iron ore mining project (MMS Project). An agreement was structured such that:
- FSD secured the buy option for the purchase of the tenement subject to the condition that FSD spend at least $2.5 million for exploration services;
- the price for the purchase would be calculated by reference to the mineral resources available from the tenement; and
- FSD would grant a sell option to the entity controlling the MMS Project (MMS) for an amount exceeding the purchase price, which comprised both cash and shares in MMS.
In respect of the solvency of FSD it is clear on the evidence that FSD never had any assets or available credit to meet the debts of creditors and Mr Chan had the means to meet the debts of the creditors at all times. Therefore the solvency of FSD was reduced to an assessment of the likelihood that Mr Chan would continue to support the Company by financial means:
- while FSD was incorporated, exploration work performed and some creditors paid for exploration works by Mr Chan in compliance with the conditional buy option;
- the Sell Option which was to be granted by FSD to MMS was never finalised;
- a breakdown in relations had occurred between Messrs Chan & Mr Kwok and the individuals controlling MMS;
- There were never alternative options created by FSD for it to develop the tenement itself – the exit strategy had always been to sell the tenement to MMS for cash and shares in MMS.
The Court held that Mr Chan was minded to fund the operation of FSD because of his interest in a prospective transaction or transactions which went beyond the exploration of the tenement and which would benefit him personally.
Mr Chan’s preparedness to fund FSD was qualified by the prospect that, for one or more reasons, the on sale to MMS would not happen.
The court followed the earlier decisions of International Cat Manufacturing Pty Ltd & Anor v Rodrick & Ors (2013) 97 ACSR 200 and Mulherin v Bank of Western Australia  QCA 175 Ltd in taking in to account not only the means of the person or entity supporting but also the likelihood that the support would continue. Given the breakdown in the relationship and the failure of the parties to come to some agreement as to the sell option to MMS, in addition to other uncertainties which faced the MMS board in relation to their ability to fund the acquisition of the tenement, the Court held the likelihood of Mr Chan being prepared to support FSD was low.
Relevance to Insolvency Practitioners
Insolvency Practitioners should make careful enquiry as to the company history and background when being requested to express an opinion as to company solvency based on the support of a company by a third party entity or individual.
This decision demonstrates the Courts willingness to make detailed enquiry in to the history of a company including its formation, trading history and the relationships between associated parties so as to consider the likelihood or preparedness of the third party to continue to support the company, not simply the third parties means to support the company or their past conduct in doing so.