Legal provisions related to solvency and insolvency tests

1.According to the provisions of Section 95A (2) of the Corporations Act 2001 (Cth), a person, company, partnership or trust is not recognized as legally solvent if the debts on their part were not paid on due time. The concept of solvency is defined in the provisions of Section 95A (1) of the Corporations Act 2001, which refers to the ability on the part of a person or company to pay the debts which has become due and payable. In this regard, according to the provisions of Section 95A (2) of the Corporations Act 2001 (Cth), a person or a company is unable to pay the due debt is not considered as solvent. In the case of Sutherland v Hanson Construction Materials Pty Ltd (2009), it was held by the NSW Supreme Court that, the nature of solvency is generally determined in regard to the mode of cash flows of the company. It is noteworthy to mention here that, under the Corporations Act 2001 (Cth), the concept of insolvency is usually used in order to refer to companies whereas, and the term bankruptcy is used in reference to individuals. It is worthwhile to refer here that, the legal definition of insolvency under the Corporations Act 2001, is such that it seeks to maintain an equitable balance between the interests of the debtors and creditors. In most of the cases, the nature of the equitable balance is such that it seeks to create a balance between the creditors, debtors and the wider community when there is an inability on the part of the debtors to address the financial obligations. In case of New Cap Reinsurance Corporation (in liq) v Grant & Ors, the facts were in relation to the future claims that whether the nature of insurance and reinsurance contracts are such that they could be considered as debts in order to conduct insolvency test under the provisions of Section 95A of the Corporations Act 2001 (Cth).

Evidence can be of two kinds- direct and circumstantial. Direct evidence is such that it is to the point and an individual can rely upon it completely without further reasoning for the purpose of proving its existence. On the other hand, circumstantial evidence is not structured directly to the facts of the case. In case of circumstantial evidence, reasoning must be applied for the purpose of linking the circumstantial evidence in order to get desired results. It is worth mentioning that, in case of insolvency, circumstantial evidence is generally applied in order to prove the relevant facts.

Formation of partnerships under section 6 of the Partnership Act 1891

In case of insolvency, the cash flow focuses upon the sources of income on the part of the company including the expenditure obligations. In cases involving insolvency, it is difficult to prove the nature of insolvency with direct evidence. Therefore, circumstantial evidence proves to be relied upon. In most of the cases, the court reviews the balance sheets of the company by focusing on the value of the assets and liabilities that has been depicted in the books and records. It is worthwhile to mention here that, the aim of the insolvency report is to emphasize upon the nature of solvency and provide relevant information to the Court regarding the question of solvency. In order to present expert report or circumstantial evidence, experts basically depends upon the books and records of the company for the purpose of providing circumstantial evidence on the location and system of record keeping, the adequacy of such system in regard to the provisions of Section 286 of the Corporations Act 2001(Cth) and the solvency of the company. 

It is evident that, it is important on the part of the insolvency practitioners to deal with the issues of insolvency of a company despite; the company’s financial records, accounting books and software are devoid. In spite of all these, legal practitioners must identify the relevant assets, creditors’ reports by investigating the pre-insolvency dealings on the part of the company. In order to present circumstantial evidence, it is important to rely upon- the Balance Sheet Insolvency Test, Cash Flow Insolvency Test and the Unreasonably Small Capital Test.

Balance Sheet Insolvency Test:

Applying the balance sheet test, the Court is required to analyze the comparison of fair value on the part of the debtor’s assets in regard to the mentioned value of the liabilities. The nature of solvency analysis plays significant role in providing circumstantial evidence. In order to conduct solvency analysis, the assets and liabilities on the part of the debtor needs to be valued by depending upon the relevant information.

Cash Flow Insolvency Test:

Applying the cash flow insolvency test, the Court is required to determine that whether the debt on the part of the debtor is due or not. In most of the cases, the amount of the debts and the due dates of indebtedness are usually considered by the Court. In this regard, the Court is at the authority to take into account the number of debtor’s debt, the proportion of the debt, which are not being paid the tenure of non-payment, and the other existing circumstances, which resulted into the stoppage of payments.

Unreasonably Small Capital Test:

Examination of relevant case law

The Unreasonably Small Capital Test is defined as the financial condition that is referred to as the inability in the generation of sufficient amount of profits for sustaining operations. This is due to inability on the part of the debtor to pay the obligations that are due.

It can be stated that the circumstantial evidence contributed a lot in proving the elements of the provisions of Section 95A (2) of the Corporations Act 2001 (Cth). The mode of the cash flows of the company can be easily determined by applying the Cash Flow Insolvency Test and the results would serve as a relevant circumstantial evidence. However, the Balance Sheet Test can signify the creation of balance between the creditors and the debtors in case of inability on the part of the debtor to clear the existing financial obligations.

2.The subject matter of the case is based on the provisions of the Partnership Act 1891 (Qld.) and a case analysis has been provided in this report. the case of Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22 is based on the fundamental criteria of partnership and this case helps to identify the definition and characters of partnership and it also assists to evaluate the essential elements of partnership. According to section 5 of the Act, partnership is a system where certain people agree to profess a business with certain common share of profit. The scope and effect of the term partnership is vast. The provisions of the Act are applied on the Limited Partnership firm and the same institution should be incorporated under the Corporation Act 2001. 

The main facts of the case is that one Four Media Management was entered into a contract with two famous singers named Elton John and Cilla Black for conducting one program with them. The main financer of this program was Volume Sales (Finance) Pty Ltd, who gave their consent for the program with certain terms and conditions. One of such conditions is that the finance company will take a share of the whole program as their consideration for investing in the business. It has been observed that certain joint ventures have taken into place and it has been mentioned and agreed between both the parties that after the repayment of the loan, all the profits come out from the business will be shared equally between the company and the promoter of the program. After a case has been filed against the Volume Sales, the primary issue cropped up from the same is whether there is a partnership arises in between the Fourth Media and Volume Sales or not.

According to section 6 of the Partnership Act 1891, there are certain elements that will consider whether there is a partnership in between the parties or not. Partnership is a common form of business where two or more than two people agreed to incorporate a business by sharing their profits and both the parties will be responsible for the acts of others. It has been stated under section 6 (a) of the Act, partnership will form in case of tenancy or common property if the owners are sharing their profits. However, it should be pointed out that sharing of return is not enough for the formation of the partnership. There must be certain common interest over the business matter. The prima facie evidence regarding the partnership is to establish whether there is any relationship in between the parties or not. Further, it is to be analysed whether both the parties are sharing their profits with certain common interest or not.

In this case, it can be observed that before the commencement of the program, certain conditions have been made by the Volume Sales regarding the consideration for the party. It has been proposed by the Volume Sale that they will invest their money in the program contracted by the Four Media on one condition. They will take certain share of the program and on getting positive consent from the other party; the investment company has agreed to invest in that program. Therefore, according to the provisions of section 5 (definition) and section 6 (elements of the Partnership), it can be stated that there was a profit sharing process has been generated in between the parties and they have able to make a contract on the same. Further, it can be stated that the parties have able to form a partnership by having a common interest regarding the program. According to the general provisions of the Partnership Act, sharing of profit could not be the only requirement for the formation of the partnership. There must be certain common interest and rights between the parties. The common interest in this case is the commencement of the program and both the parties have given their consent on the theme. Further, it is to be stated that the promoter and the investor of the program have made an agreement to realise the program and view their profits. Therefore, it can be stated that certain common interest have been cropped up in this case and the parties could therefore be regarded as partner and they have similar liability against each of them and one partner will be liable for the rights and obligation of other party. 

Further, it has been decided in this case that the interest of the partners are quite vast and there is no limitations incurred on the liabilities. According to Justice Luxmore (1933), partners have an equitable interest on the partnership assets, they are holding that thing together, and they will responsible for that conjointly. In this case, it has been observed that the defendant has certain equitable interest over the program and therefore, it can be stated that there is partnership exists in between them.

3.The main subject matter of the court is based on the case of In the matter of Gunns Plantations Limited (Administrators appointed) (Receivers and Managers appointed) that has been filed in 2012. The liquidators of the Gunns plantation for obtaining certain direction in this case have made the application under section 511 of the Corporation Act 2001. It has been applied that the liquidators should have gained certain powers to terminate the rights of the Growers so that not all the investment schemes operated by one GPL (Gunns Plantation Limited) could be facilitate and the liquidators could start the winding up process of the alleged company. In this application, one plea has been made to terminate all the receivers appointed to GPL. The company Gunns Plantation Limited was one of the largest incorporated reforest product companies in Australia and has certain branches in various zones in Australia. However, according to the advisory board of the company, the financial condition of that group is not up to the mark and it is better to appoint certain liquidators to assess the financial condition of the company.

The court in this case has pronounced certain decisions on this matter that is quite remarkable. The court has accepted the petition of the liquidators and mentioned that the claim of the liquidators in this case is quite justified. The liquidators can amend the provisions of the company constitution of Gunns Plantation Limited to terminate the rights of Growers. The reasons for the decision are to facilitate the winding up process of the company. Further, it is also important to instigate the realisation process of the scheme assets with the help of the receivers and the court was of the view to amend the provisions of the company constitution under section 601GC (1) (b) of the Corporation Act 2001. It has also held by the court to amend the sale and termination power of the company. The observation of the court has enabled the liquidators to terminate the receivers without obtaining any additional direction from the court.

The main legal principle that has been included in the case is section 511 of Corporation Act 2001. It has been stated by the court that the plea made by the liquidators is quite fair and they can terminate, relinquish or surrender the project documents of the company. Further, it has been held by the court that the business sale contract of the company can be extent by the liquidators with the view to prepare the resale process of the company. Further, a proper procurement process of the company has been directed to be initiated by the capacity of the liquidators and the provisions of the side letter agreements were attempted to be amended properly. However, the provision of the company should be amended within the territory of legal provision. It has been held by the court that the amendment process should follow the criteria of section 601GC (1) (b) of the Corporation Act 2001. Considering the brief of the case study, it has been observed that the receivers of this case have entered into a contract with the Trust company Ltd, this company is a part of the Gunns Group, and therefore, all the leasehold interests and assessing operations of the company have been involved in the program. When it has been come to the conclusion that the financial condition of the company is too low and it is necessary to winding the company, the liquidators are required to be imposed with certain power to take necessary decisions in this effect. Therefore, the court has taken such decision. 

There are certain reasons for making such decisions by the court. The most applied provision in this case is the proper application of section 511 of Corporation Act 2001. According to the legal perspective of this section, it can be stated that application under this section can be made by the court with the purpose to empower the proper authority. According to the section, the court can empower the liquidator or the creditor to exercise certain power of the court so that the winding up process of the alleged company can be generated. According to the norms of the Australian Securities and Investment Commission (ASIC), when a company becomes insolvent, it is necessary to wind up the company with a view to secure the interest of others. If the administrators of the company have failed to resolve the issue, the director of the company could initiate liquidation process of the company so that they can take control of the company. In this case, it has been observed that the liquidators are required to gain certain additional power to initiate the winding up process due to certain hostile provisions of the company constitution. In this matter, they are required to obtain permission from the court and make an application under section 511 of the Corporation Act 2001. After analysing all the aspects, the court has decided to accept the application and give permission to the stated liquidators to change the provision of the Constitution of the Company.

In this case, it has been observed that the court has accepted the application made by the liquidators under section 511 of the Act. However, certain problems the liquidators may have to face if the said application would be rejected. The liquidators could apply their power to certain extent. In case of any problem, the liquidators could discuss the matter with the company and try to resolve the dispute to ease the winding up process of the company. 

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