Back to the Future – Testing Insolvency

Back to the Future – Testing Insolvency

Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025 arose from the collapse of Arrium Ltd and a number of its subsidiaries in April 2016.

It is a complex case with a myriad of issues and a lengthy judgment.  For brevity, this report is  confined to the court’s consideration of the facts relevant to the question of solvency and, in particular, how the court should deal with future events in assessing that question.  In this case, the issue was whether from 7 January 2016 Arrium was unable to pay a debt falling due in July 2017.


In Anchorage Capital, two proceedings were brought concurrently by lenders.  A third proceeding was brought by the liquidators against directors for insolvent trading.  That claim settled in principle during the hearing.

Relevantly, the claims in Bank of Communications Co Ltd v Sparkes (No 2) were made against the Group Treasurer and Chief Financial Officer of the Arrium Group.  In essence, the plaintiffs made claims under section 18 of the Australian Consumer Law for misleading statements said to be contained in a number of Drawdown Notices issued by Arrium entities between 7 January 2016 and 16 February 2016.  The Group Treasurer and CFO were responsible for authorising and issuing the Drawdown Notices.

Plaintiffs’ Case

In substance, the plaintiffs’ case raised the question whether any of the Arrium entities was insolvent between 7 January 2016 and 16 February 2016.

The plaintiffs contended that:

  • each Drawdown Notice issued in accordance with a facility agreement made a representation to the effect that the Arrium entities were solvent at the date of the facility agreement and at each drawdown date would continue to be able to pay all of debts as and when they became due and payable;
  • the representations were false because Arrium was insolvent from at least 7 January 2016, because it could not pay its banking facilities maturing in July 2017.  It was not part of the pleaded case that Arrium was insolvent because it could not pay other debts that became due before July 2017;
  • but for the misleading conduct, none of the advances would have been made with the result that the Arrium entities would have been placed into administration by no later than 7 January 2016.


As a threshold issue, Justice Lee observed that the question of solvency should be determined at a group level because of cross-guarantees and inter-company loans between companies in the Group.

It was common ground that the plaintiffs bore the onus of proof and that the appropriate test of solvency was that adopted in section 95A of the Corporations Act 2001 (Cth).

The question whether a company can pay its debts as and when they become due is a question of fact that involves a realistic commercial assessment of the company’s financial position as a whole (see Sandell v Porter (1966) 115 CLR 666 per Barwick CJ at 670).

The plaintiffs identified four principles said to emerge from the cases:

  1. The fact of insolvency must be proved on the ordinary civil standard, that is, on the balance of probabilities.
  2. A debt is taken to be owing at the time stipulated for payment in the contract unless there is evidence proving to the court’s satisfaction that there has been an express or implied agreement between the company and the creditor for an extension of time or that some estoppel applies or there is evidence of an imminent compromise between the creditor and the debtor.
  3. The test of insolvency is future looking. Consequently, the question is not simply whether the company can pay debts falling due at or around the date the question arises, but whether as at that date it can pay debts falling due in the future.
  4. Although the question of solvency is to be determined by reference to the circumstances as they were known or ought to be known at the date at which the question of solvency is assessed and not in hindsight, the court can have regard to what actually happened to the extent that what actually happened sheds light on what was likely at the time when the question of insolvency is to be assessed.


Justice Lee said that normally a court will not look too far into the future because there are so many unknowns and contingencies, but sometimes it may be appropriate to do so.

His Honour observed that the assessment the court must make is whether it can be said that as from 7 January 2016 Arrium was unable to pay a debt falling due in July 2017.  His Honour said at [266], “It involves a prediction based on what was known and knowable as at 7 January 2016.  In order to make that prediction … there needs to be a high degree of certainty that that state of affairs would come about on the basis of the facts known or knowable at the earlier date”.

7 January 2016 Drawdown Notice

The plaintiffs contended that by 7 January 2016, it was apparent that Arrium’s ability to repay the facilities falling due in July 2017 was entirely dependent on the sale of mining consumables for a sufficient price and that Arrium would not be able to achieve such a price.

Expert witnesses for the plaintiffs accepted that the best available business records for assessing the cash flows of the Arrium Group were the budget forecasts and business plans prepared by the group.  Justice Lee found that the business plans were an appropriate basis by reference to which Arrium’s solvency should be judged and that none of those sources of information indicated that Arrium would run out of cash prior to the July 2017 facilities falling due.

The plaintiffs’ expert gave evidence of considerable uncertainty concerning Arrium’s future.  But Justice Lee found this evidence did not demonstrate that there was no realistic prospect that Arrium would be able to sell mining consumables for an acceptable price before July 2017, or that Arrium was not in a position to resume the sale of mining consumables later in the year.

The plaintiffs relied heavily on the fact that Arrium went into voluntary administration on 7 April 2016.  However, Lee J found that the appointment proved only that the directors were of the opinion that Arrium was likely to become insolvent. The opinion of the directors does not establish the position objectively.  Further, his Honour found this contention involved impermissible use of hindsight.

16 February 2016 Drawdown Notice

Justice Lee observed that circumstances changed very substantially between 16 February 2016 and 7 April 2016.  It was apparent that Arrium was not going to get an acceptable price for mining consumables as a result of the then current sales process. There were therefore three main possibilities available to Arrium at that time. The first involved refinancing the whole of its debt.  The second involved reaching a new agreement with its current lenders.  A third involved doing nothing immediately and addressing the issues later in the year when market conditions were expected to improve.  Each of these options was a realistic possibility as it 16 February 2016 and before.

As at 16 February 2016, it was reasonable to expect that the lenders would continue to cooperate with Arrium.  Once it became clear that the sale of mining consumables would not proceed, discussions with the lenders resumed. The lenders indicated that they did not want Arrium to go into administration, that they were willing to negotiate with Arrium and, as part of those negotiations, to provide additional liquidity if that was necessary.

When the lenders said that they had lost confidence in the board, it became clear that an agreement with them was no longer possible.  That explains why the board appointed administrators.  However, Justice Lee said it says nothing about what was possible or likely between 7 January 2016 and 16 February 2016.


Justice Lee observed that the relevant debts were not due for approximately 18 months or longer.  His Honour said at [298] “In the normal course of events, it would not have been expected that the debts would be repaid in full.  Rather, it is to be expected that they would have been refinanced with the same or different lenders, quite possibly on different terms and in different amounts.  As is apparent from the advice that Arrium was receiving, in some cases banks may be prepared to accept less than 100 cents in the dollar because they accept that this is the best way of maximising their returns on the debt that they are owed”.

In conclusion, his Honour said “However, looking at the position 18 months before the debt was payable, the possibility of compromise together with the other possibilities available to Arrium at that time are relevant to the question whether it can be said at that time that Arrium would be unable to pay its debts 18 months later.  For these reasons I have given, there were still a sufficient number of possibilities open to Arrium to deal with its bank debt that it could not be said that it was insolvent in January or February 2016.”

Take Aways

Whilst this case did not proceed as a claim under s 588G of the Act, it nonetheless serves as a useful illustration of the principles of establishing insolvency.

It should also be kept firmly in mind that the case involved a publicly listed company which relied on borrowings for part of its working capital.  In the normal course of events, it would be expected that the company would roll over or replace on an ongoing basis the relevant borrowings as they became due for repayment.

Most insolvent trading cases, however, are concerned with trade creditors who, often without agreeing to an extension of time, have not taken active steps to insist on payment of debts.  The fact that they have not done so is not evidence that the debtor is solvent.  Generally, unless a director is able to prove that as a result of some agreement or compromise that the debts were not payable in the amount or at the time originally agreed, the fact that the company could not pay those dates on time is usually evidence of insolvency.