TGIF 8 August 2025 – Reliance on supporting creditor to satisfy presumed insolvency

This week’s TGIF considers the recent Supreme Court decision of Re ML & NB Pty Ltd [2025] VSC 444. It concerns the extent to which a plaintiff can rely on a statutory demand issued by a supporting creditor to satisfy the presumption of insolvency.

Key takeaways

• To secure the benefit of a presumption of insolvency in a winding up application, it is crucial to pay strict attention to evidence of effective service of a statutory demand.
  
  
• Ineffective service of a statutory demand may not affect the validity of a winding up application, but it can shift the evidentiary basis and require the creditor to prove actual insolvency.
  
  
• In certain circumstances, a plaintiff can rely on non-compliance with a statutory demand issued by another creditor to secure the benefit of a presumption of insolvency.

Background

FlexiCommercial Pty Ltd (FlexiCommercial) commenced proceedings seeking to wind up ML & NB Pty Ltd (the Company). Proceedings relied on the Company’s failure to comply with a statutory demand or alternatively, that the Company was insolvent within the meaning of section 95A of the Corporations Act (the Act). The Company opposed the application on the grounds that the Company was solvent.

BP Australia, a supporting creditor, filed a notice of appearance in the winding up application. BP Australia had obtained its own judgment debt against the Company and issued a statutory demand. The Company had failed to comply with BP Australia’s statutory demand and had not applied to set the statutory demand aside.

FlexiCommercial discovered an error in the affidavit evidencing service of the statutory demand. Subsequently, FlexiCommercial was concerned that it may not be able to prove effective service of the statutory demand and rely on non-compliance as a basis of presumed insolvency in the winding up application. Without the benefit of the statutory presumption of insolvency, FlexiCommercial would need to satisfy the Court that the Company was actually insolvent.

To overcome this evidentiary burden, FlexiCommercial applied to amend its winding up application to rely alternatively on the Company’s non-compliance with BP Australia’s statutory demand to satisfy the presumption of insolvency.

Decision

In granting leave for FlexiCommercial to amend its winding up application to rely on non-compliance with BP Australia’s statutory demand to satisfy the presumption of insolvency, Gitsham JR considered:

• that FlexiCommercial had appropriate standing as a creditor of the Company;
  
  
• the overarching purpose of the Act was to facilitate the quick determination of winding up applications;
  
  
• the purpose of any winding up application is to assess the solvency of a company. Where a company is insolvent, the winding up application commences the process to seek recovery of assets for distribution amongst all creditors, as opposed to recovering the applying creditor’s debt;
  
  
• the presumption of insolvency will arise where there is non-compliance with a statutory demand;
  
  
• the language of the Act does not prohibit a creditor from relying on non-compliance with a statutory demand served by another creditor to satisfy the presumption of insolvency;
  
  
• BP Australia’s statutory demand had expired and the full debt remained unpaid as at the relevant date (being three months prior to FlexiCommercial filing its winding up application);
  
  
• there was no material prejudice suffered by the Company in the granting of the leave. The Company could amend its grounds of opposition and prepare evidence accordingly.

Comment

This case is a reminder that deficiencies in a statutory demand may be critical to the outcome of winding up proceedings. Where an error in proper service of a statutory demand is identified following winding up proceedings commencing, it may be possible for the plaintiff to maintain its application and satisfy the evidentiary burden by relying on non-compliance with another creditor’s statutory demand.

In circumstances where a plaintiff seeks to rely on non-compliance with a statutory demand issued by another creditor, the plaintiff may be at an evidentiary disadvantage because it will not have direct knowledge of the debt owed. The plaintiff should therefore, prepare its evidence wisely.