Case: Lewis v Doran [2004] NSWSC 608 ; (2004) 184 FLR 454
Outcome: referred to
approach to assessing insolvency set out by Palmer J in Lewis v Doran [2004] NSWSC 608 ; (2004) 184 FLR 454 at [106] [108] is particularly instructive. Those paragraphs are set out below. They relate to the Corporations Act 2001 (Cth) ("the Corporations Act "), but are applicable to like considerations which arise under the bankruptcy legislation. I think that I must approach the application of s 95A [of the Corporations 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 realisations are achievable... Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621 ; (2001) 53 NSWLR 213 at 224 [2001] NSWSC 621 ; ; 164 FLR 430 (citations of authority omitted)... The question of a company's solvency may arise retrospectively or prospectively. The question arises retrospectively where, for example, a liquidator is seeking to recover an unfair preference or to set aside an insolvent transaction so that the issue is solvency as at a date prior to the winding up. The question may arise prospectively where a company is sought to be wound up in insolvency and the company's ability to pay its debts must be determined not only by reference to debts payable as at the date of trial but also by reference to its ability to pay debts which will fall for payment some time in the near future. Where the question is retrospective insolvency, the Court has the inestimable benefit of the wisdom of hindsight. One can see the whole picture, both before, as at and after the alleged date of insolvency. The Court will be able to see whether as at the alleged date of insolvency the company was, or was not, actually paying all of its debts as they fell due and whether it did, or did not, actually pay all those debts which, although not due as at the alleged date of insolvency, nevertheless became due at a time which, as a matter of commercial reality and common sense, had to be considered as at the date of insolvency. By reference to what actually happened, rather than to conflicting experts' opinions as to the implications of balance sheets, the court's task in assessing insolvency as at the alleged date should not be very difficult. Transferring the matters referred to by Palmer J to their current context, the following propositions may be stated: The bankrupt's financial position must be considered as a whole, having regard to commercial realities. Resources available to the bankrupt, whether by cash or realisation of assets or by borrowing upon security, are to be taken into account. With hindsight, the bankrupt's ability to pay his debts as and when they fall due is to be assessed.