Litig8: Debt repayment arrangements and their effect on a company’s solvency

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Each month as a part of Mills Oakley’s Litig8, we bring to you snapshots of eight key cases, legislative changes or other legal events. The summaries are not comprehensive and do not constitute legal advice. You should seek professional advice before taking any action based on the content of this article.

Part 1 of the March edition of Litig8

This case serves as a warning to creditors that entering into a repayment arrangement with a debtor can compromise future efforts to prove the debtor’s insolvency.

In a recent decision of Smith v Offermans [2015] QCA 55, the Queensland Court of Appeal confirmed the effect of a debt repayment arrangement on a debtor company’s solvency.

Mills Oakley represented the applicant, a director of a company in liquidation that had previously entered into a debt repayment arrangement with the ATO. The respondent was the liquidator of the company, who brought proceedings for insolvent trading.

The District Court awarded summary judgment to the respondent, holding that the company was insolvent at the relevant date on the basis the repayment arrangement evidenced that the company could not pay its debts to the ATO as and when they fell due.

The applicant successfully appealed this decision.  The Court of Appeal found that as the repayment arrangement was in place at the relevant date, the total amount of the ATO debt was no longer due and payable.  As long as the company could pay the monthly instalments, it could not be shown to be insolvent on the basis of that debt.

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