The recent decision of Quin v Vlahos  VCSA 205 (Quin) in the Victoria Supreme Court of Appeal has provided important commentary on when third party funds can be considered in determining a company’s solvency, as well as relying upon unreconciled accounts to prove solvency.
Quin involved Roderick Group (the Company, which operated a business selling discounted textbooks to students. The respondent, Mr David Vlahos, was the Company’s sole director. During 2013 and 2014, many of the Company’s debts were paid from personal accounts of Mr Vlahos and his wife and in August 2014 and the Company was then placed into liquidation.
During the initial proceedings, the liquidator alleged Mr Vlahos breached his duties under section 588G of the Corporations Act 2001, by failing to prevent the Company from trading while insolvent. The liquidator also alleged that certain payments made by Mr Vlahos were voidable transactions.
At first instance, the proceeding was dismissed as the Associate Judge held:
- the Company was able to pay its debts as it had access to the accounts of Mr Vlahos and his wife; and
- the accounts the liquidators relied upon were unreconciled, and therefore could not be relied upon to prove insolvency of the Company.
The liquidator appealed the decision to the Court of Appeal on these two points which, provided practical commentary for future disputes.
third party funds
The Court of Appeal held that there are certain circumstances in which third party funds can be considered.
Relevantly, the key principles regarding third party funds are as follows:
- whether the Company has a sufficient degree of assurance that the third party funds will be made available to it as and when required;
- the availability of third party funds must be considered from an objective standpoint of the Company, rather than from the perspective of the third party funder;
- the party seeking to rely on the availability of third party funds bears the onus of proof; and
- there must be “cogent evidence”, or very convincing evidence, that the third party funds were available to the Company at the given time.
In the case of Quin, the Court did not need to decide on this issue as the funds in Mr Vlahos’ account were not sufficient to pay the Company’s debts. However, the Court still noted that in any event, the Company did not have the sufficient degree of assurance that the third party funds were available to it
The Court noted there was no formal or informal agreement between Mr Vlahos and the Company, and the funds were available only at Mr Vlahos’ “unfettered discretion”.
unreconciled financial statements
The Court of Appeal overturned the trial judge’s decision that accounts must be reconciled in order to rely upon on them to determine questions of solvency.
The Court of Appeal confirmed there is no requirement to reconcile accounts. Instead, the accounts must be “sufficiently reliable” when considered in light of the other evidence.
key takeaways when assessing solvency
When taking into account third party funds, a company must have a sufficient degree of assurance that these funds will be made available to it. This will be considered from the objective standpoint of the company, and there must be cogent evidence the funds are to pay for the company’s debts.
In addition, a liquidator may rely on unreconciled financial statements to prove that a company is insolvent.