Non payment of debt
Legal8/02/2021 12:00:00 AM

Bankruptcy & Insolvency - Non-payment of debt insufficient to establish insolvency

It has been held that the non-payment of debt (even significant and undisputed debt) is not, of itself, sufficient to establish insolvency. There must be more. In Re MSB Capital Holdings Pty Ltd (2020) 38 ACLC ¶20-061; [2020] VSC 775 (MSB Capital Holdings), Matthews JR held that where a plaintiff must prove actual insolvency, undisputed debts are only one factor to consider in determining a company’s financial position.

The facts

Henclo Investments Pty Ltd (Henclo) had applied for MSB Capital Holdings Pty Ltd (MSB) to be wound up after MSB failed to pay an outstanding judgment debt. Henclo had only issued a letter of demand but had never filed a statutory demand for the outstanding debt. As a result, Henclo was required to show that MSB was actually insolvent ie unable to meet their liabilities. Matthews JR held that the financial records of MSB were largely irrelevant in demonstrating the financial position of MSB as they only showed the assets of MSB. This was despite the fact that the records showed a deficit in assets and income. Likewise, MSB’s refusal to participate in a winding up procedure did not, of itself, imply insolvency.

The key in proving the actual insolvency of MSB was to show that MSB was actually unable to meet their liabilities and was not merely refusing to meet those liabilities. Put simply, Henclo was required to prove that MSB could not pay, rather than would not pay, their debts. If there is any doubt as to whether a company can pay its debts, as and when they fall due, then a court cannot declare that company to be insolvent.

In determining insolvency, courts may also look to other factors such as:

  • Outstanding tax liabilities,
  • Continuing losses,
  • Issuing post-dated cheques, and
  • Inability to provide accurate financial reports or financial forecasts.

Key takeaways

There are a number of key takeaways from MSB Capital Holdings:

  1. Impacts of the COVID-19 pandemic — It is likely that the courts will be even more stringent on the requirements for proving insolvency as a result of the COVID-19 pandemic. The courts are likely to be reluctant to declare a company to be insolvent unless there is clear proof that the company cannot meet their liabilities, as opposed to a situation where a company simply will not meet those liabilities. Even a temporary inability to pay debts, due to circumstances like a pandemic, will be insufficient to determine insolvency.
  2. Protecting creditor interests via a statutory demand — Given the stringent position of the courts in this matter, creditors are advised to protect their interests by engaging in the statutory demand winding-up process. If a statutory demand is not issued, creditors risk falling into the scenario demonstrated in MSB Capital Holdings and will be obliged to show more than the mere existence of an unpaid debt as evidence of insolvency, even in circumstances where that debt is substantial and/or undisputed.

You can read more on our Pinpoint® platform about insolvency and statutory demands.

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Sources: In the matter of MSB Capital Holdings P/L (ACN 630 039 646); Henclo Investments P/L v MSB Capital Holdings P/L (ACN 630 039 646) (2020) 38 ACLC ¶20-061; [2020] VSC 775, 25 November 2020, accessed 30 July 2021.

CCH Pinpoint®, Re MSB Capital Holdings Pty Ltd (2020) 38 ACLC ¶20-061; [2020] VSC 775, [headnote], Supreme Court of Victoria, 25 November 2020, accessed 30 July 2021.

CCH Pinpoint®, Company’s insolvency, 30 April 2018, accessed 30 July 2021.

CCH Pinpoint®, Presumptions of insolvency, 30 April 2018, accessed 30 July 2021.

CCH Pinpoint®, Statutory demands, accessed 30 July 2021.

© CCH

CCH Pinpoint
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