The decision of Austin Australia Pty Ltd v De Martin Gasparini Pty Ltd  NSWSC 1238 considered the definition of, and tests for determining, “solvency” under the Corporations Act 2001 (Cth).
The case was part of a preference proceeding, that dealt with the winding up of a corporation, Austin Australia Pty Ltd (Austin). It was necessary for the court to answer as a separate question whether Austin was “insolvent” under the statutory meaning during the period 30 June 2003 and 31 December 2003.
In deciding the question of solvency, the court had regard to the following evidence:
- Available cash flow as evidenced by bank statements and the amount owing by the prior month’s debtors. Deductions were made for unpresented cheques, retentions and provisions.
- Cash flow showed Austin did not have enough cash on a month-by-month basis to cover its accounts due and payable from March 2003 to November 2003. A deficit ran from $3 million in June 2003 to $7.3 million in November 2003.
- In November 2003, there were between 600 and 700 unpresented cheques, totalling $7,891,004.08. $1,181,981.28 of this figure had been released to payees, but were unpaid at month’s end. $6,709,022.80 were cheques drawn but not released to payees. It was inferred that these cheques were deliberately held back.
- Austin’s debtors that had been outstanding for over 120 days increased from 4% to 22% from April 2003 to November 2003. It was considered unlikely that these debts would be recovered in full.
- “Cash burn” exceeded available cash for each of January, March, April, May, September, October and December 2003.
- There was a total accumulated loss of $1,413,020 from November 2002 to November 2003, without write offs for bad debts, doubtful debts or other adjustments.
- Austin also had proceedings against debtors in the New South Wales Court of Appeal, the Magistrates’ Court of Queensland, the District Court at Penrith, the Local Court at Orange, the Local Court at Parramatta, the District Court at Sydney and the Melbourne Magistrates’ Court.
The Decision of Barrett J
In determining the question of insolvency, Barrett J considered three matters:
- Section 95A of the Corporations Act 2001 (Cth), which defines solvency as the ability of a person to pay debts when they become payable, and insolvency as a person who is not solvent.
- The “cash flow test” espoused in Crema Pty Ltd v Land Mark Property Developments Pty Ltd (2006) 58 ACSR 631, which recognised that insolvency was more than a temporary shortage of liquidity, but rather an endemic shortage of working capital.
- Indicative features, including:
- There was no real evidence of dishonoured cheques, whilst a large number of cheques had been held back;
- Suppliers insisting on COD terms, of which there was some evidence;
- Issuing of post-dated or “rounded sum” cheques, Barrett J finding that rounded sum cheques had been used;
- Special arrangements with creditors;
- An inability to produce timely, audited accounts;
- Unpaid group tax, payroll tax, workers compensation premiums or superannuation contributions;
- Demands from bankers to reduce overdraft and deteriorating relations with bankers;
- Receipt of letters of demand; and
- Statutory demands and court processes for debt, a large number of which had been commenced.
Barrett J found Austin’s position was not merely a temporary situation. Profitability did not exist and the company could not meet its debts. Further, there were no external sources of funds for it to draw on. This resulted in the finding that there was an endemic shortage of working capital and inability to pay debts, and that the company was insolvent from 30 June 2003 to 31 December 2003.