Recent decisions in Star Recruitment Service Pty Ltd v Smith and Re Gemwood Projects Pty Ltd (in liq) highlight the increasing scrutiny courts are applying to insolvency allegations and the importance of properly testing a company’s solvency position before claims are pursued or settled.
In Star Recruitment, the Court found the director liable for insolvent trading after the company continued to incur substantial debts while unable to pay creditors as they fell due. The decision reinforces the continuing risks for directors who trade through financial distress without clear evidence of solvency or access to reliable funding support.
By contrast, Gemwood demonstrates that insolvency is not always straightforward. The Court carefully examined the company’s access to related-party financial support and ultimately found significant issues with the liquidator’s approach to the insolvency analysis and conduct of the proceedings.
Together, the cases reinforce several important principles:
- insolvency is determined by commercial reality, not merely unpaid debts or balance sheet deficiencies;
- courts will closely scrutinise assumptions made by liquidators and experts;
- related-party or external funding arrangements may be relevant in assessing solvency; and
- contemporaneous financial evidence remains critical.
Importantly, these decisions also carry a strong message for creditors who receive unfair preference claims.
Recipients of preference demands should not assume the company was insolvent simply because a liquidator asserts it. In many cases, solvency remains genuinely contestable and may depend on matters such as:
- access to finance;
- director support;
- related-party funding;
- payment arrangements with creditors; or
- the broader trading context at the time.
Accordingly, any party served with a preference claim should seriously consider obtaining an independent solvency report at an early stage. A properly prepared expert report can materially strengthen negotiations, expose weaknesses in the liquidator’s case, and in some instances defeat the claim entirely.
As courts continue to closely examine insolvency evidence, early expert analysis is becoming an increasingly important strategic tool in defending recovery proceedings.
If you are served with a preference claim from a liquidator, what do you do? In today’s environment of closer scrutiny, getting the right advice early can make all the difference.
DVT Mcleods brings together deep forensic expertise and practical, commercial thinking to deliver clear, independent solvency analysis and strategic support. Whether you’re dealing with a claim or looking to challenge one, we help cut through the noise, test the numbers, and put you in a strong position to move forward with confidence.
