Case: Sandell v Porter [1966] HCA 28 ; (1966) 115 CLR 666
Outcome: followed
seminal authority in relation to the meaning of "insolvency" is Sandell v Porter [1966] HCA 28 ; (1966) 115 CLR 666 in which the High Court considered the meaning of insolvency under s 95 of the Bankruptcy Act 1966 (Cth). Barwick CJ (with whom McTiernan and Windeyer JJ agreed) said at 670-671: "... Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due." What is made clear in Sandell v Porter and restated in subsequent cases is that a temporary lack of liquidity does not mean that there is insolvency. As Mandie J pointed out in Australian Securities and Investments Commission v Plymin (supra) at 209, s 95A of the Act provides a "cashflow test" of insolvency which Mandie J described as follows: "The cashflow test provides that a company is insolvent when it is unable to pay its debts as they fall due. It is of no consequence, under this test, that assets exceed liability. The important point is: can the company pay its way in carrying on its business? The court, in examining whether a company is suffering cashflow insolvency, will consider whether the Company is actually paying its debtors". The authorities in relation to determining whether a person or a company is insolvent were exhaustively analysed by Mandie J in Australian Securities and Investments Commission v Plymin (supra) particularly at pars [370]-[380]. I do not propose to rehearse those authorities but would adopt, with respect, the analysis by Austin J in Re United Medical Protection Ltd (prov liq appt) [2003] NSWSC 1031 ; (2003) 47 ACSR 705 at 718 where his Honour said the following points emerge from Mandie J's review of the authorities: "whether or not a company is insolvent ... is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole", and is a question to which '[c]ommercial realities will be relevant": Southern Cross Interiors Pty Ltd (in liq) v DCT [2001] NSWSC 621 ; (2001) 53 NSWLR 213 at 224; [2001] NSWSC 621 ; 188 ALR 114 at 124-5; [2001] NSWSC 621 ; 39 ACSR 305 at 316-17 per Palmer J; "it is useless to say that if its assets are realised there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy": Re Tweed Garages Ltd [1962] Ch 406 at 410 per Plowman J; "it is thus of no consequence, of itself, that assets exceed liabilities, the important point being whether the company can pay its way in carrying on its business": see A R Keay, "The insolvency factor in the avoidance of antecedent transactions in corporate liquidations" (1995) 21 Monash Univ LR 305 at 307); "the question is not whether the debtor would be able, if time were given to him, to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available": Bank of Australasia v Hall [1907] HCA 78 ; (1907) 4 CLR 1514 at 1528 per Griffith CJ; "It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency": Sandell v Porter [1966] HCA 28 ; (1966) 115 CLR 666 at 670 per Barwick CJ; "If, as a matter of substance, the company is not able to pay its debts as they become due, the circumstance that the relevant creditors may give the company some time before they actually seek to enforce their remedies, and the company may well be able to pay them out given that time, will not negative the application of the section": Standard Chartered Bank of Australia Ltd v Antico (Nos 1 &amp; 2) [1995] NSWSC 31 ; (1995) 38 NSWLR 290 at 331 per Hodgson J; "for the purpose of assessing insolvency, a contractual debt is taken to be payable at the time stipulated for payment in the contract, unless there is evidence of an express or implied agreement between the company and creditor for extension of time, or a course of conduct sufficient to give rise to an estoppel against the creditor, or an established practice in the industry or between the company and its creditors whereby debts are taken to be payable at some other time than provided for in the contract: Southern Cross Interiors at NSWLR 225; ALR 125 ; ACSR 317."