Insolvency laws and its affect on companies

The recent collapse of Darrell Lea is a timely reminder that retailers should familiarise themselves with insolvency laws and how they can affect their companies.

Assessing solvency

Section 95A of the Corporations Act 2001 (Corporations Act) provides 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. A person who is not solvent is insolvent’.

In the decision of Sandell v Porter (1966) 115 CLR 666 at 670 it was held that insolvency means:

‘an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own are not limited to his cash resources immediately available. They extend to monies which he can procure by realisation of a sale, mortgage, or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency... ought not to be drawn simply from evidence of a temporary lack of liquidity’.
 

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