When is a company insolvent?

The New South Wales Supreme Court1 has summarised some principles from accepted authorities on the question of whether a company is insolvent at a given time.

While the references are made in an Australian context, the principles are also applicable in New Zealand. The principles are:

• Whether a company is insolvent is a question of fact to be ascertained by consideration of the company’s financial position taken as a whole.
  
  
• Considering the financial position taken as a whole, a court must have regard to commercial realities in considering what resources are available to meet the company’s liabilities as they fall due (including whether resources other than cash are realisable by sale or borrowing and when such realisations are achievable).
  
  
• In considering whether a company’s lack of liquidity is temporary or permanent it is proper for a court to have regard to the commercial reality that, under normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade. However, this does not necessarily mean that the company can treat trade creditors as a cash or credit resource which can be taken into account in determining solvency.
  
  
• In assessing solvency, a court will assume that a contract debt is payable at the time stipulated in the contract unless there is evidence of an agreed extension of time, conduct giving rise to an estoppel or a well established course of conduct whereby debts are paid at a later time.

1 In White Constructions (ACT) Pty Limited (In Liquidation) v White and Others [2004] NSWSC 71

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