Queensland Supreme Court considers the relationship between a disputed debt and a company's solvency pursuant to section 459S of the Corporations Act - Insolvency/Bankruptcy

BACKGROUND

Stephanie Roebuck As Executor Of The Deceased Estate Of Suzanne Florence Bulwinkel (Roebuck) served Bulwinkel Enterprises Pty Ltd (Bulwinkel) with a statutory demand for the payment of $990,377.63 monies owing in connection with an unpaid trust distribution and loan between the parties.

Bulwinkel did not comply with the statutory demand, nor did it apply to have the statutory demand set aside. After 21 days, Roebuck applied for an order to wind up Bulwinkel in insolvency (Application), pursuant to s459P of the Corporations Act 2001 (Act).

Bulwinkel opposed the Application on the grounds that the amount in the statutory demand was not owed (Disputed Debt). However, because Bulwinkel did not apply to have the statutory demand set aside on this ground prior to the expiration of the 21 day period, Bulwinkel required leave of the Court to oppose the Application on that ground pursuant to s459S of the Act. Such leave is not to be granted by the Court, unless the ground for opposing the Application "is material to proving that the company is solvent".

Bulwinkel submitted various personal reasons why no application to set aside the statutory demand was filed and argued that if the Disputed Debt was not owing, the company was solvent.

LEAVE TO OPPOSE WINDING UP APPLICATION

In Switz Pty Ltd v Glowbind Pty Ltd¹, Spigelman J articulated the relationship between a disputed debt and the company's solvency, as having to be directly "applied to a process" of establishing solvency, as opposed to being in mere "contemplation before the court".
Other authorities, as summarised in McPherson's Law of Company Liquidation, point to "material" meaning "likely to influence the determination of a cause rather than to be necessarily decisive of it".

In line with the latter view, Martin J granted leave to Bulwinkel to oppose the Application, because the Disputed Debt was "likely to influence the determination" of Bulwinkel's solvency.

SOLVENCY OF BULWINKEL

After considering the financial documents, Martin J found that the Disputed Debt was in fact owing and, not having the ability to pay the Disputed Debt, Bulwinkel was in fact insolvent.

Alternatively, Martin J found there was a significant overestimation in the value of assets, as well as a deficit in respect of another loan. Therefore, regardless of the Disputed Debt, Martin J held that Bulwinkel had not shown that is was solvent.

COMMENT

The statutory demand procedure is rigid and the threat of winding up often has the effect of ensuring that recalcitrant debtors do not seek to exploit the costs and delays that legal issues impose on commercial transactions.

However, this case makes it clear that where a disputed debt is likely to influence the determination of a company's solvency, it will be a material ground pursuant to s459S(2) of the Act and therefore give rise to leave being granted to oppose a winding up application.

Footnote

¹ (2000) 48 NSWLR 661.

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