Expert solvency reports are typically used by Parties to a proceeding in a court, to resolve the question of whether a company or individual was insolvent at a particular point in time. They are handy in all matter of circumstances, including those in the infographic at the bottom of this article.
Solvency reports can be prepared by accountants or lawyers, but a decade of experience doing these reports has taught me that its easier (but not crucial) if you are both.
As they are one of my favourite service lines for clients, as it tests all aspects of your insolvency law/accounting knowledge and skill, I thought I would share some short case study experiences on where solvency reports have gone well for our clients (all names fictitious).
Case Study 1 – Using solvency reports to settle an unfair preference claim commercially
Solvency reports can be used as a tool to show a Liquidator that their claim is not as strong as they might think, thereby, (as it did here) ending up in the parties reaching a commercial settlement. Construction X Pty Ltd entered Liquidation in 2017, and its Liquidator identified that a number of creditors received payments for their debt in the 6 months prior. This they alleged were called unfair preferences (learn about unfair preferences here).
I was briefed in 2019 by a lawyer representing 2 of the creditors being pursued to review the Liquidators expert insolvency report and prepare my own report to test when Construction X became insolvent (if at all). The Liquidator opined that it had been insolvent for a year prior, whereas my report was used to demonstrate serious doubt that it was insolvent for more than 2 months, let alone the whole 6. This meant the bargaining position of the creditor increased, such that they reached a commercial settlement with the Liquidator for less than their claim and without the added costs of going to trial.
Case Study 2 – Creditor-initiated insolvent trading claim
Did you know that section 588M(3) of the Corporations Act 2001 allows creditors, in certain circumstances, to pursue directors of a liquidated company for insolvent trading? It is an underutilised provision by creditors and can result in substantial gains for the applicant creditor. In this case study, I was briefed by lawyers acting for a creditor that intended to pursue such a claim, to prove that the entertainment company was insolvent for a period of at least 4 years prior to the Liquidators appointment.
With minimal books and records and incorrect financials, my team undertook the complicated task of reconstructing non-going concern-based financials for the 4 year period. Much of the work here involved using source invoices and bank statements to piece together the trading operations of the business, to better understand whether the company could meet its debts as and when they fell due (pursuant to s 95A of the Corporations Act 2001). After a contested trial in the Queensland District Court, the Court found in favour of the opinions I expressed in the solvency report and found in favour of the applicant creditor on all counts.
Case Study 3 – Preparing expert solvency reports for other liquidators
My team is regularly briefed by lawyers acting for other insolvency firms to prepare solvency reports in respect of company’s they are appointed Liquidators over. One of the biggest involved an alleged elaborate scheme by various related parties to regularly appoint external administrators to cleanse themselves of all debts over-and-over again, without ever lodging any tax returns or business activity statements with the ATO. After decades of non-compliance the ATO eventually wound-up a number of these entities, and I was briefed by the Liquidators lawyer to prove that these companies had been insolvent for at least a 6 year period prior.
As with any such scheme, books and records were non-existent, and so the only 3 things that we could rely upon were the proofs of debt lodged by creditors, 6 years worth of bank statements and anything the ATO had in its possession. The solvency report carefully analysed the trading operations of the business (via the bank statements) and reconstructed what the tax debts probably ought to have been had the relevant lodgements occurred. The ATO and the Liquidator successfully recovered millions of dollars from the related parties, upon the filing of my solvency report into court.
As demonstrated in the three case studies presented, engaging a professional to conduct an expert solvency report can have far reaching implications. A high quality report needs to be concise, comprehensive and persuasive. Not only can it provide clarity over a company’s financial position during formal insolvency proceedings, quite often it can lead to a more defined course of action and a significant return to creditors. If you need to unravel a question about company solvency, critique a report from the “other side” or make sense of a liquidator’s report, SV Partners can help.Article written by Matthew Hudson (Associate Director) – Brisbane