Case: Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621 ; (2001) 53 NSWLR 213
Outcome: cited
In Lewis v Doran (2005) 219 ALR 555 at [79], Giles JA (with whom Hodgson JA and McColl JA agreed) quoted with apparent approval the following passage from the reasons of the primary judge (Palmer J): "I think that I must approach the application of s 95A of the [Act] with two considerations in mind. First the words of s 95A must be construed as they stand, without addition or subtraction. Second, the law both before and after the enactment of s 95A is unequivocally and emphatically clear that insolvency is, first and last, a question of fact 'to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realizations are achievable': Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621 ; (2001) 53 NSWLR 213 at 224." (The emphasis is mine.) I agree "that insolvency is, first and last, a question of fact". Giles JA went on to say at [103]: "Solvency or insolvency is a state on which directors and others act in current conduct, for example if the issue is trading while insolvent. Section 95A speaks of objective ability to pay debts as and when they become due and payable, but ability must be determined in the circumstances as they were known or ought to have been known at the relevant time, without intrusion of hindsight." It must also be borne in mind that the plain words of s 95A ("as and when they become") require anticipated debts to be taken, to some extent, into account in determining solvency. 47 In Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621 ; (2001) 53 NSWLR 213, Palmer J reviewed at length the authorities on determining solvency. His distillation thereof (at [54]) bears repeating: "[T]he following propositions may now be drawn from the authorities: (i) whether or not a company is insolvent for the purposes of the Corporations Act (Cth), ss 95A , 459B , 588FC or 588G (1)(b), is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole ...; (ii) in considering the company's financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable ...; (iii) in assessing whether a company's position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity resulting in insolvency, it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency ...; (iv) the commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand ...; (v) in assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the Court's satisfaction, that: &#8226; there has been an express or implied agreement between the company and the creditor for an extension of time stipulated for payment; or &#8226; there is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment; or &#8226; there has been a well established and recognised course of conduct in the industry in which the company operates, or as between the company and its creditors as a body, whereby debts are payable at a time other than that stipulated in the creditors' terms of trade or are payable only on demand ...; [and] (vi) it is for the party asserting that a company's contract debts are not payable at the times contractually stipulated to make good that assertion by satisfactory evidence ...." (I have omitted the numerous citations.)