Presumed Insolvent?

When creditors really want to get aggressive in collecting, one of the common strategies that will be used is a statutory demand for payment of debt under the Corporations Act 2001.

Options are available to apply to the Court to set aside that document or negotiate an outcome, however, occasionally for various reasons it is not feasible to avail yourself of those options.

The consequence of not setting aside or compromising the statutory demand effectively within 21 days of service on you is that your company will be ‘presumed insolvent’. On the basis of that presumption, the creditor (or any other creditor) can apply to the Court to wind up your company.

Restrictions on Argument

There are severe limitations about what you can argue in a winding up application on the basis of noncompliance with a statutory demand. You cannot argue any ground that was available to you to be argued in an application to set aside the statutory demand. Specifically, this means that you cannot argue that you have a genuine dispute about the existence or quantum of the debt. The application for winding up is not an opportunity for you and the creditor to ventilate any dispute that might exist about whether the debt was properly incurred or not. You may have rights in other forums to argue those points, however, the application for winding up is not the place to do that.

Accordingly, when deciding how and if the respond to a statutory demand, you need to be aware of the restrictions upon you for arguing about the statutory demand or the debt alleged at a later date, should the creditor continue to be aggressive.

Is it Game Over?

Although your company will be presumed to be in insolvent circumstances, that presumption is able to be rebutted by presentation of evidence to the Court. Put simply, if you can demonstrate to the Court that the company is actually solvent, then you are able to avoid being wound up even though the statutory demand had expired.

Principally you will need to get evidence from an experienced and independent insolvency practitioner (accountant) in order to persuade the Court that the company is solvent. That practitioner will look at a number of factors in order to demonstrate solvency of your company. Some of those factors include the following considerations:

  • Any continuing losses;
  • Whether liquidity ratios are below 1;
  • Any overdue Commonwealth and state taxes;
  • The relationship with present bank, including ability (or not) to borrow further funds;
  • Whether there is access to alternative finance;
  • Ability to raise further equity capital;
  • Whether suppliers are placing the company on COD, or otherwise demanding special payments before resuming supply;
  • Any creditors unpaid outside trading terms;
  • Issuing of post-dated cheques;
  • Dishonoured cheques;
  • Special arrangements with selected creditors;
  • Solicitors’ letters, summonses, judgments or warrants issued against the company;
  • Whether there are payments to creditors of rounded sums which are not reconcilable to specific invoices;

The ability to produce timely and accurate financial information to display the company’s trading. The above factors are indicators only, not any one of which is determinative of the fundamental question of solvency.

With all of the above factors in mind, ultimately the Court will be asking the question: Can the company pay its debts as and when they fall due? The answer will be found after all the circumstances are examined.

So what do I do?

If, for some reason, a statutory demand has gone unanswered and the company is presumed insolvent, it is not the end of the line. If you are served with a winding up application on the basis of presumed insolvency, there are still avenues to resist those orders being made.

Your first reaction should be to immediately get advice from your legal advisors and, through your legal advisors, an insolvency practitioner. Together they will be able to take a rational and independent assessment of your prospects of resisting a winding up application. On the back of that advice, you will be better informed about your options and able to have meaningful discussions with the other party.

After all, most creditors do not want to actually wind up your company, they want to be paid. If you can satisfy them that the winding up application is futile and will be resisted effectively, then they will need to seek other avenues of collecting the debt which might give you broader opportunity to get an acceptable outcome.