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We wanted to mention Australia just as an excuse to gloat over the Ashes victory this summer, but finding a link between insolvency and our antipodean cousins was less than easy. Happily, their Supreme Court recently came up with an interesting decision on the Aussie equivalent of wrongful trading.

The Australian Corporations Act states that “a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable”. It goes on to say that “a person who is not solvent is insolvent”. In other words, the definition is broadly similar to that in section 123 of our own Insolvency Act, albeit somewhat more tightly drawn.
It is established law Down Under that the cash flow test for insolvency is the principal yardstick, with only subsidiary relevance attaching to the balance sheet assessment.

The Court noted that the emphasis must be on the extent of cash and other liquid assets versus total debts payable immediately and in the near future. Insufficiency of cash or liquid assets which is more than temporary is determinative of insolvency.

In the case of Sutherland (as Joint Liquidator of Australian Coal Technology) v Hanson Construction Materials Pty Ltd the Supreme Court found that, over a three month period preceding its liquidation, Australian Coal Technology (“ACT”) showed a continuing increase in liabilities coupled with a decrease in receivables and a deteriorating relationship with suppliers. It found that ACT’s cash and other liquid assets were insufficient to meet debts due and payable and to become due and payable in the near future. The insufficiency was deep-seated and endemic.

Australian decisions are, of course, not particularly relevant to English jurisprudence, but we thought it was an interesting case and one which carries a warning to directors of companies in England who adopt a “rose-tinted glasses” approach to future cash flows.

IMPORTANT NOTE: This article is intended for general information only. It is not a substitute for specific advice which should be sought for specific cases. We cannot accept responsibility for any action (or decision not to take action) made in reliance on the content of this publication.