Statutory demands - The difficulty in rebutting the presumption of insolvency

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30 April 2010

The recent case of Turco & Co Pty Ltd v Pendella Holdings Pty Ltd [2010] FCA 213 illustrates the practical difficulties faced by a debtor company which, in order to avoid being wound up, attempts to rebut a presumption of insolvency as a result of failing to comply with a statutory demand. The case highlights the importance of debtor companies complying with, or setting aside, statutory demands in order to avoid the presumption arising in the first place.

Background

The creditor served on the debtor company a statutory demand which was not met or set aside. As a result, the debtor was presumed to be insolvent as a result of section 459C of the Corporations Act and the creditor applied to wind up the debtor company on that basis.

The debtor resisted the creditor’s application. In order to rebut the statutory presumption of insolvency, the debtor attempted to prove that it was solvent through affidavit evidence from a director of the debtor and an independent accountant who had been engaged by the debtor to conduct an audit of the debtor’s financial statements. The accountant was cross-examined by the creditor.

While there was nothing to suggest that the debtor had the ability to meet the debt owed to the creditor, it seemed that it was the only creditor requiring immediate payment. Apparently, all other creditors were prepared to accept delayed payment.

The evidence overall demonstrated a variety of factors that lent support to the view that the debtor might be solvent. However, that is as far as it went and solvency was not clearly proven.

Did the debtor rebut the statutory presumption?

The court said that in determining cases like this it looks to independent evidence going to the solvency of the debtor. However, in this case, the independent evidence only revealed that the solvency/insolvency position of the debtor was “on a knife’s edge”.

The court also stated that a material factor was the debt the subject of the statutory demand (ie the debt owed to the creditor).

Whilst it acknowledged that it is a drastic step to wind up a company, and that it should not make such orders lightly, the court concluded that it was bound to order that the debtor be wound up if the presumption of insolvency could not be displaced.

Significance

The case illustrates the practical difficulties faced by a debtor company seeking to avoid liquidation after it has ignored a statutory demand and insolvency is presumed. In such circumstances, the onus shifts to the debtor in respect of the solvency/insolvency question, so that the debtor then has to positively prove that it is solvent, failing which the court will almost certainly make winding up orders.

To avoid this, companies served with a statutory demand should deal with them head on in order to avoid the statutory presumption of insolvency arising in the first place.

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