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Federal Court orders winding up of company despite uncontested expert evidence that the company was solvent

The Federal Court recently gave its decision in Aerial Capital Group Ltd, in the matter of M. M. International (Australia) Pty Ltd v M. M. International (Australia) Pty Ltd [2017] FCA 1607, which was a case involving an application to wind up M. M. International (Australia) Pty Ltd in insolvency, following non compliance with a statutory demand seeking payment of $56,234.55.

When a Company owes more than $2,000, the Creditor can send the Company a statutory demand which is a document prescribed by the Corporations Act 2001. Where the Company does not comply with the statutory demand within 21 days, it is deemed to be insolvent. What then often follows is the Creditor applies to the Court for an order that the Company be wound up in insolvency. When it gets to this stage, usually the only way that the Company can avoid the winding up order is to pay the debt, or prove to the Court that it is solvent.

In this case, the Company defended the application on the basis of its claim that it was solvent. In support of its contention, it put into evidence a report from a certified practising accountant, who had practiced as an accountant since 1978. The opinion was that the Company “is able to meet it’s financial obligations, as and when they fall due”, which means in effect that it is solvent. The opinion was ‘uncontested’ in the sense that the applicant Creditor did not introduce expert evidence to contest the opinion of the Company’s accountant.  

Notwithstanding this, the Judge gave very little weight to the opinion of the accountant, because she found that he had not independently turned his mind to matters relevant to whether the Company was in fact solvent. In doing so, her Honour said: 

"A court is not bound to accept an expert’s evidence (even uncontradicted evidence), especially where it relates to ultimate issues: see Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; NSWCA 305"

The Court was not satisfied that the Company was solvent and therefore ordered the winding up of the Company.

Obviously, it is best to avoid getting into the situation where you have to prove solvency by dealing with the statutory demand within the 21 day timeframe. In the event that doesn’t happen, this case is a reminder that, if a Company is seeking to resist a wind up on the ground that it is solvent, a carefully prepared report from an insolvency expert is likely to be required.

Our lawyers are very experienced in handling statutory demands and solvency issues, having acted on both sides in many of these types of matters. If we can be of any assistance with an issue you have in this area, please contact us.

 

Tom O’Shea