Solvency Tests and Presumptions

Determining whether a company is insolvent is important given its legal consequences. Essentially, a company is insolvent if it cannot pay its debts as and when they fall due: s 95A of the Corporations Act 2001 (Cth). This test is known as the cashflow test and the emphasis on it has meant that the balance sheet test is of secondary importance. 

There are a number of indicia of insolvency including:-

  • dishoroured cheques;
  • suppliers requiring cash on delivery;
  • the existence of special arrangements with creditors;
  • etc. 

Insolvency Disputes

Such disputes arise: -

  • when a company is trying to work out whether it is insolvent perhaps requiring voluntary administration;
  • about whether the company can be presumed to be insolvent;
  • in the context of insolvent trading claims against director;
  • when considering unfair preference claims.

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  • Consider the indicia of insolvency.
  • The application of the cash flow test.
  • With the presumptions that can be used to prove insolvency.

* This content does not purport to give legal advice. Readers must obtain their own legal advice, that applies to the particular circumstances of their case, before taking any action at all.