Our ‘Australian Restructuring and Insolvency Guide’, is a practical resource when facing distressed situations, enforcement options and insolvency processes in Australia. It brings together the key legal principles and the commercial considerations that typically arise when matters move from stability to stress.
The guide is presented as a series of focused sections, each designed to stand alone as a practical reference for live matters.
While the series focuses on Australian law, it is also relevant to overseas practitioners and stakeholders dealing with Australian restructures, insolvencies, distressed investments, cross-border recovery, and creditor strategy.
Series roadmap
Across 13 parts, the series covers:
Part 1 – General | Part 8 – Security |
Part 2 – Types of liquidation and restructuring processes | Part 9 – Clawback and related-party transactions |
Part 3 – Insolvency tests and filing requirements – (this article) | Part 10 – Groups of companies |
Part 4 – Directors and officers | Part 11 – International cases |
Part 5 – Matters arising in a liquidation or restructuring | Part 12 – Quick reference |
Part 6 – Creditor remedies | Part 13 – Update and trends |
Part 7 – Creditor involvement and proving claims |
Part 3
Part 3 moves into the threshold question of insolvency. It covers the cash flow test under section 95A of the Corporations Act, how courts assess solvency in practice, and the filing considerations for directors once insolvency is suspected, including voluntary administration, insolvent trading risk, and safe harbour protection.
Insolvency tests and filling requirements
Conditions for Insolvency
- What is the test to determine if a debtor is insolvent?
Section 95A of the Corporations Act 2001 (Cth) provides that a company is solvent if it can pay all its debts as and when they become due and payable. Further, section 95A provides that a company that is not solvent is insolvent.
The definition focuses on a “cash flow test” of insolvency, and not simply a “balance sheet test”. However, a company’s balance sheet remains relevant, because the cash flow position must be assessed by reference to the company’s financial position as a whole. Thus, insolvency is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole and taking into consideration commercial realities.
Consistent with the definitions contained in section 95A, the Courts have held that solvency is a question of fact, assessed based on the company’s liquidity, ability to borrow, and realisability of assets (ASIC v Plymin [2003] VSC 123 [373]–[384]). While balance sheets may assist in evaluating solvency, courts have cautioned that they are not determinative.
Mandatory filing
- Must companies commence insolvency proceedings in particular circumstances?
There is no statutory obligation for a company to takes steps to appoint an external administrator (i.e. commence insolvency proceedings) upon becoming insolvent. However, directors have a duty to prevent the company from incurring debts when the company is insolvent or becomes insolvent by incurring this debt, and there are reasonable grounds to suspect so, and the director is or a reasonable person in such position would be aware of such grounds. Breach of this duty may expose directors to personal liability for insolvent trading.
To mitigate this risk, directors may appoint a voluntary administrator if they consider that the company is insolvent or likely to become insolvent. Commencing voluntary administration provides temporary protection from creditor claims in order to enable a voluntary administrator and creditors to consider the future of the Company. Directors may also access broader safe harbour protection by developing a course of action reasonably likely to lead to a better outcome than liquidation.
Next, Part 4
Part 4 turns to the personal exposure of directors and officers once insolvency risk becomes real. It covers insolvent trading, civil and criminal liability, available defences, safe harbour protection, the need to consider creditor interests as the company deteriorates, and the limits on directors’ powers once an external administrator is appointed.
If you are a director, officer, creditor or adviser dealing with a company in financial distress, the timing and evidence behind each decision matter. We can help assess exposure, preserve safe harbour options, manage continued trading risk, and respond quickly where control of the company is shifting. Our restructuring and insolvency work is designed to be commercial, evidence-disciplined, and aligned to the outcome that matters, whether that is protection, recovery, stabilisation, or an orderly external administration.
Further Information
For further information about insolvency testing in Australia, director filing considerations, insolvent trading risk, voluntary administration, and safe harbour protection, please contact the author of this article.
