Australian insolvency law

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals.

Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

A person is legally insolvent if they are not able to pay all their debts, as and when they become due and payable. Solvency and insolvency are defined so as to be mutually exclusive.

The common law has also established various indicators of insolvency. These indicators include amongst others:

In certain circumstances a debtor may be presumed to be insolvent without the need to actually prove financial insolvency. A company will be presumed to be insolvent if, during or after the three months preceding the day on which an application was made for the winding-up of the company, any one of the following six situations occurs.

A popular way for a creditor to prove that a company is insolvent is to serve a statutory demand pursuant to section 459E of the Corporations Act. Issuing and serving a statutory demand is a relatively simple and inexpensive process when compared against proving actual financial insolvency. Statutory demands are regulated by Part 5.4, Divisions 2 and 3 of the Corporations Act, and the Courts require that the regime be strictly adhered to. Because a company will irrebuttably be presumed to insolvent where a statutory demand is not complied with, the Court requires creditors to ensure that demands are expressed in clear, accurate and unambiguous terms. Even a small error may result in the statutory demand being set aside by the Court. The statute specifies the form of the demand, and requires that the demand must:

In relation to the debt to which the demand relates:

The demand must be served on the company by leaving it at its registered office, sending it by post to that office, or delivering a copy of the demand personally to the director of the company.

Upon being served with a valid demand, the debtor may either pay the debt, or secure or compound the debt to the creditor's reasonable satisfaction. Failure to do so within 21 days (unless an extension is granted) will mean that insolvency of the debtor is presumed and the creditor may use that presumption in order to make a winding-up application to the Court.

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