Winding up proceedings: Leave to oppose and proving solvency

Insolvency

The recent decision of the Victorian Supreme Court in Tambanis v Optimal Mining Ltd demonstrates the high threshold for a debtor proving solvency where a creditor has issued a winding up application based on non-compliance with a Creditor’s Statutory Demand.

Upon service of a Statutory Demand, a debtor is required to pay the debt claimed in the Statutory Demand within 21 days or make an application to set it aside, failing which the creditor can issue winding up proceedings. The debtor’s failure to comply with the Statutory Demand means that there is a presumption that the debtor is insolvent. The debtor must then seek leave of the Court to oppose the winding up application under section 459S of the Corporations Act in order to prove solvency.

Case overview – Tambanis v Optimal Mining Ltd

In this case, the creditor (Mr Tambanis) served the debtor (Optimal) with a Statutory Demand in the sum of $213,922.00.  Optimal failed to comply with the Statutory Demand within the required 21 day   time frame and, as such, Mr Tambanis issued winding up proceedings against Optimal.  The Court made preliminary orders that Optimal be given an opportunity to make an application seeking leave under section 459S of the Corporations Act to adduce evidence as to solvency. At the final hearing of the matter, Optimal relied on the following factors to prove solvency:

    1. the value of its mining exploration rights (in the sum of $5,216,318);
    2. cash at bank (in the sum of $239,244.00);
    3. its audited financial statements included the debt owed to Mr Tambanis and the liquidity ratio was 1.22;
    4. its tax obligations were up to date; and
    5. it had $300,000.00 on call from a convertible note.

Optimal also argued that there was a dispute as to the judgment debt and the winding up application was an abuse of process being used by Mr Tambanis as a debt recovery mechanism.  Optimal made no application to set aside the judgment debt nor an application to set aside the Statutory Demand prior to the winding up application being issued.

The Court found that Optimal was unable to rebut the presumption of insolvency due to an expert report filed on behalf of Mr Tambanis which stated, among other things, that:

    1. Optimal obtained funding via a capital raising and it was not clear as to whether this had been completed so Optimal did not have sufficient funds to pay creditors;
    2. Optimal did not produce any further evidence as to the value of its major asset being the mining exploration permits – no permits were provided and, even if they were higher than the amount shown, Optimal was unwilling or unable to borrow against these assets;
    3. the terms of the convertible note were contradictory, that is, the funds, if provided (which was unknown), would need to be immediately repaid should Optimal commit an event of default. The default events included Optimal being insolvent and unable to pay its debts or if a winding up application was issued;
    4. Optimal had a history of trading losses;
    5. Optimal’s current liabilities exceeded its current assets where the current assets would only be able to cover between 1% – 24% of its current liabilities;
    6. Optimal had generated no income in the financial year of 2020 and in the period between July 2020 to March 2021; and
    7. Optimal did not have the requisite funds to satisfy the judgment debt.

Summary

Although Optimal attempted to rely upon the issue of the Statutory Demand as an “abuse of process” and its apparent financial position, the Court ordered that Mr Tambanis was entitled to rely on the presumption of insolvency and that Optimal should be wound up. Judicial Registrar Steffensen relied on the fact that there was no reliable evidence provided to demonstrate that Optimal had readily realisable assets and cash available to meet its liabilities.

Key take-away

In order for a debtor to rebut the presumption of insolvency in respect of a Statutory Demand and oppose a winding up application, it is prudent for the debtor to provide the Court with either expert evidence, or evidence of all sources of funds, assets and liabilities, and be able to show that the debtor has the ability to readily realise assets or borrow against them. Optimal did not provide sufficient evidence to enable it to rebut the presumption of insolvency.

The team at Wisewould Mahony has extensive experience with corporate insolvency matters, including opposing winding up applications for debtors.

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