The NSW Supreme Court of Appeal has unanimously upheld the decision of Palmer J in Lewis v Doran confirming that in considering a company’s solvency under section 95A of the Corporations Act, a court may consider the availability of outside sources of funding, even if unsecured. In considering such funding, it will be necessary to know whether it was or would have been made available on deferred payment terms, or otherwise, so that the funder did not just become another creditor, whose debt could not be repaid as and when it becomes due and payable.
Some other interesting points arising out of this Appeal are:
- Unsecured debts which are ostensibly payable on demand, may not necessarily be immediately due and payable e.g. director’s book loans. Evidence can be provided to show that the debt was not going be demanded in the immediate future, so it may not therefore be immediately due and payable.
- Whether debts existing at a certain date will be able to be paid when they fall due, must be determined in the circumstances of the relevant time, without the intrusion of hindsight, but looking at the immediate future. How far into the future you must look will depend upon the circumstances, including the nature of the company’s business and of the future liabilities.
- The later discovery that a liability existed at the relevant time, or the later quantification of a liability at an unexpected level than was known at the relevant time, may be excluded from consideration if the lability was unknown, or known in a lesser amount at the relevant time.
- The court reaffirmed an often stated proposition that it is necessary to apply a cash flow test and not a balance sheet test in assessing solvency.
Based on this decision and the earlier case law, to determine solvency it will be necessary to:
- Isolate and examine the debts existing as at the date in issue;
- Assess when those debts will fall due for payment, based either on the trading terms, or any later variation to those terms agreed between debtor and creditor.
- Then assess whether the company can pay those debts when they are due and payable, including by giving consideration to funds potentially available on unsecured loans from others, including companies in the group.
For more information contact James Hamilton on (02) 9018 6403 or jhamilton@rbhm.com.au
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