Last reviewed and updated: April 2026
When is an Australian company considered to be insolvent?
The answer to that question can have significant ramifications for
affected business owners, directors, regulators, employees and creditors, whose
interests in the outcome of that determination may directly conflict.
Section 95A of the Corporations
Act 2001 (“the Act”) sets out
the test of insolvency in this way: “(1)
a person is solvent if, and only if, the person is able to pay all of the
person’s debts, as and when they become due and payable. (2) A person who is not solvent is insolvent.” The reference here to a “person” includes a
company.
When the court is called upon to determine whether or not a company is
(or was) insolvent, or when it became insolvent, the court is often faced with
a complex task. To assist the courts in
determining the answer to these questions, the courts have developed a number
of principles that it will consider and apply.
Helpfully, these were recently set out by the Federal Court in Pearce v Gulmohar Pty Ltd[1] as follows:
- Insolvency is a question of fact to be ascertained
from a consideration of the company’s financial position taken as a whole. In doing so, the court must have regard to
commercial realities, which 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.
- The definition focuses on a “cash flow test” of
insolvency, and not simply a “balance sheet test”. However, a company’s balance
sheet remains relevant, because the cash flow position must be assessed by
reference to the company’s financial position as a whole.
- Insolvency is an “endemic shortage of work capital”. Such
a position is to be distinguished from a temporary lack of liquidity. Thus, a
temporary lack of liquidity is not equivalent to insolvency and, conversely,
neither is availability of surplus assets at a particular point in time
conclusive of solvency.
- In assessing when debts are due and
payable, the test is what debts are legally due, having regard to the agreement
between the parties. This approach
allows for situations where there is sufficient evidence of waiver of legal
requirements, but reluctance by creditors to enforce legal rights is not
sufficient. It does not matter that a creditor is unlikely to enforce its debt
because the statutory test is whether the debt is due and payable at law.
- On this test, it is immaterial that a
company disputes a claimed debt. Such a dispute may require some form of
determination, but does not alter whether the debt is legally due. The
defendants have not contended to the contrary.
- Where there are contract debts, it is
for the party asserting that those debts are not payable at the times
contractually stipulated to make good that assertion by satisfactory evidence.
- The words “as and when they become due” are forward looking. That is,
consideration is given to not only debts presently payable, but those that will
become payable in the near future.
- In assessing the assets available to
pay the company’s debts, the relevant question is as to what assets are capable
of realisation within time to meet the company’s indebtedness.
- Where the company is trading with no
intention of selling stock-in-trade or inventory outside the ordinary course of
business, the value of that inventory should be excluded from the solvency
analysis.
- Similarly, assets required to operate the business as a going concern
(such as plant and equipment) are also excluded. In Re Timbatec Pty Ltd,[2] Bowen CJ said that a
debtor cannot rely on realising assets that would involve a cessation or
breaking up of its business. If a company has to resort to selling assets that
are essential to the continuation of its business, those assets are not to be
included in a determination of solvency.
- In proving insolvency, expert evidence from the liquidator may be relied
upon.
- In ASIC v Plymin (No 1),[3] the Court identified a
number of common, albeit not essential, features in insolvency situations. That
judgment has been referred to with approval in many subsequent decisions. The
features are:
- Continuing losses.
- Liquidity ratios below 1.
- Overdue Commonwealth and State taxes.
- Poor relationship with present Bank,
including inability to borrow further funds.
- No access to alternative finance.
- Inability to raise further equity
capital.
- Suppliers placing [company] on COD,
or otherwise demanding special payments before resuming supply.
- Creditors unpaid outside trading
terms.
- Issuing of post-dated cheques.
- Dishonoured cheques
- Special arrangements with selected
creditors.
- Solicitors’ letters, summonses,
judgments or warrants issued against the company.
- Payments to creditors of rounded sums which are not reconcilable to
specific invoices.
- Inability to produce timely and
accurate financial information to display the company’s trading performance and
financial position, and make reliable forecasts.
- Importantly, this is a guide, not a checklist. It is merely a list of
factors, the presence of one or more of which may indicate insolvency.
Likewise, not all factors need be present. Further, certain factors present in
a given case may carry different weight according to the circumstances of the
particular case.
Courts in Australia are
bound to the above principles, although the above summary is not
exhaustive. Those principles are to be
applied by a court when considering the evidence and submissions present to it
by the parties. Application of the facts
to those principles is often a complex task.
Therefore it is essential that lawyers acting for parties involved in
such disputes are familiar with these principles and able to apply them when representing
clients in a dispute regarding a company’s solvency or insolvency.
At Boss Lawyers, we have
experience in assisting liquidators and other clients with insolvency
disputes. For practical legal advice, support and assistance regarding
your particular circumstances, contact Boss Lawyers. We are ready to step
in and assist you.
About David Grant | Senior Associate
David has practiced exclusively in commercial litigation and dispute resolution since 2010. David is a distinguished litigator among his peers and his approach to commercial disputes is pragmatic and outcome-orientated.
Article citations:
[1][2017]
FCA 660. In text citations omitted.
[2] [1974]
1 NSWLR 613.
[3] (2003)
46 ACSR 126 at [386].
Disclaimer: This article provides general information only and does not constitute legal advice. You should obtain professional advice specific to your circumstances.
How Boss Lawyers Can Help
If you need guidance on this issue, our experienced team can provide practical, strategic advice tailored to your situation. Our practice areas include insolvency lawyers, commercial litigation lawyers.
Contact Boss Lawyers on 1300 267 711 or visit bosslawyers.com.au.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. For expert advice, contact Boss Lawyers on 1300 267 711.
