Sandell v Porter
High Court of Australia · 1966
Sandell v Porter (1966) 115 CLR 666
A business has plenty on the books and nothing in the bank this week. Is it insolvent?
Barwick CJ said that whether the debtor had reached that state "is a question for the Court and not one as to which expert evidence may be given in terms", while accepting that experts "may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due" (at 671). Do not carry the first half of that into a uniform Evidence Act jurisdiction unqualified. Section 79 of the Evidence Act 1995 (Cth) admits opinion evidence wholly or substantially based on specialised knowledge derived from training, study or experience, and s 80 abolishes the rule that an opinion is inadmissible merely because it is about an ultimate issue or a matter of common knowledge; s 81 exempts admissions from the opinion rule. A properly qualified insolvency practitioner may therefore give admissible opinion evidence bearing on solvency. What s 79 does police is the reasoning: French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ hold that a failure to demonstrate that an opinion is based on the witness's specialised knowledge "is a matter that goes to the admissibility of the evidence, not its weight" ([42]). So what Sandell disposes of survives in a narrow form -- a bare assertion of the conclusion, unsupported by exposed reasoning, is not made admissible by the witness's expertise.
Sandell's "own money" restriction has not survived into the corporate test. Section 95A of the Corporations Act 2001 (Cth) does not reproduce it, and the primary judge's conclusion recorded by Giles JA at [80] is that the omission of "from his own monies" "removed an artificial restriction": s 95A asks whether the company can pay all its debts as they become payable "by reference to the commercial realities", and "[i]f the Court is satisfied that as a matter of commercial reality the company has a resource available to pay all its debts as they become payable then it will not matter that the resource is an unsecured borrowing or a voluntary extension of credit by another party". What actually happened afterwards can prove that such a resource was available. Giles JA at [93] adopts the same frame: insolvency is a question of fact ascertained from the financial position as a whole, having regard to commercial realities, including "what resources are available to the company", "whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable". So support from a related company can count without being legally enforceable -- what matters is whether it was, as a matter of commercial reality, available.
What happened?
A building partnership went bankrupt. Its trustees in bankruptcy moved to have repayments the partnership had made to Mrs Sandell — the appellant, who had lent it money — declared void as preferences under s 95 of the Bankruptcy Act 1924-1960 (Cth), which required the partnership to have been insolvent when the payments were made. The evidence the trustees offered on that point was thin. It comprised an affidavit whose operative paragraph simply asserted the conclusion that the partnership was insolvent, together with Mrs Sandell's admissions and her husband's evidence about the partnership's cash position, and an outstanding unpaid debt.
The case is remembered not for that evidence but for what the trustees needed to prove with it.
What did the Court decide?
The evidence did not establish insolvency, so the preference claim failed. The information offered was, "put the matter at its highest, of the most tenuous" kind; the paragraph asserting insolvency "was, in my opinion, clearly inadmissible"; and what remained did not carry the conclusion at the relevant dates. The appeal was allowed with costs, the orders about the repayments set aside, and the trustees' application in respect of them dismissed.
Proposition
What is the principle?
Insolvency is "an inability to pay debts as they fall due out of the debtor's own money", and "the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor." The conclusion "ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity" (at 670–671).
Why does this case matter?
Because of how much hangs off a single finding, and how far after the event it is usually made. Whether a company was insolvent, and from when, determines whether a liquidator can recover a payment as an unfair preference, and it is a necessary condition of a director's liability under s 588G of the Corporations Act 2001 (Cth) — necessary, not sufficient: s 588G(2) also requires that the director was aware of grounds for suspecting insolvency, or that a reasonable person in a like position in a company in the company's circumstances would have been.
In practice the contest is almost never about the law. It is about a date, reconstructed years later from bank statements, ageing creditor reports and what the directors were told at the time. Notice what the Court said about proving it. The conclusion belongs to the court: whether the debtor had reached that state "is a question for the Court and not one as to which expert evidence may be given in terms" — though experts "may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due" (115 CLR 666 at 671). So the bare assertion offered in this case was inadmissible. That is narrower than it sounds today — a qualified expert may give admissible opinion evidence bearing on solvency — but the assertion still has to be supported by reasoning that is exposed rather than assumed.
Exam and application relevance
Fix the date the question asks about, then ask what the debtor's position at that date allowed it to do about the debts as they fell due — which is not the same as what cash it held. Money procurable by sale, mortgage or pledge counts, and what is "a relatively short time" is measured against the nature and amount of the debts and the debtor's own circumstances. A property that would take a year to sell may still support a facility drawn down next week.
What is available is where these arguments are won or lost, particularly around support from a related company or a director. Under s 95A that support does not have to be legally enforceable: an unsecured borrowing or a voluntary extension of credit counts if, as a matter of commercial reality, the resource was there. What actually happened next is evidence of that — a company that went on paying its debts for three years with group funding was, on the facts of Lewis v Doran, shown to have had the resource all along.
Check your understanding
A company cannot pay this month's creditors but owns land it could mortgage within a fortnight. What would you need to know before saying whether it is insolvent?