Audited accounts: Not Always Necessary – ARL2 Pty Ltd v Flex Realty [2024] TASSC 5

Terracall and Associates acted for Flex Realty Pty Ltd (defendant) in proceedings brought by ARL2 Pty Ltd (plaintiff). ARL2 sought the winding up of Flex Realty on grounds of insolvency under s 459Q of the Corporations Act 2001 (Cth). ARL2 relied upon Flex Realty’s failure to comply with a statutory demand within time and argued that Flex Realty was insolvent (unable to pay its debts) because it owed ARL2 $59,000 from a previous business deal involving the sale of a rental list, part of a larger sum of $185,000.

Flex Realty successfully demonstrated its financial solvency and questioned the appropriateness of a winding-up order in circumstances where there was an underlying contractual dispute as to the validity of the debt being pursued by ARL2.

Terracall and Associates successfully proved Flex Realty’s solvency by presenting evidence to the Court illustrating the company’s stable cash flow, profitable business operations, and significant assets. These included unencumbered real estate, vehicles, and a new business overdraft facility, which collectively indicated a capacity to meet its financial obligations. The evidence highlighted the company’s steady income from real estate commissions and rental management as evidence of its financial health and ability to continue operations without risk of being unable to pay its debts as an when they fell due and payable.

Expert testimony and financial analyses played a critical role in the case, with conflicting opinions from accountants called by both parties. Flex Realty’s accountant affirmed the company’s solvency based on detailed financial statements and projections, while ARL2’s expert criticised the reliability and completeness of the financial information provided. Despite these criticisms, the Court found Flex Realty’s financial disclosures and expert testimony credible, focusing on the business’s ability to generate steady income and manage its financial affairs prudently.

The Court was critical of ARL2’s reliance on speculative assertions and incomplete financial analyses, ultimately finding Flex Realty’s evidence of solvency more convincing. The judge rejected the notion that audited financial statements were necessary to prove solvency and stated:

It is contrary to basic rules of evidence to assert there is only one method of proving solvency, namely the production of audited accounts. …

The Court considered the company’s demonstrated financial health and operational stability sufficient to rebut the presumption of insolvency.

In conclusion, the Court dismissed ARL2’s application for the winding up of Flex Realty, citing its demonstrable solvency and effective financial management. The judgment underscored the significance of comprehensive financial evidence in solvency disputes and validated Flex Realty’s position as a solvent and financially stable company, capable of meeting its debts as and when they fall due. This decision highlighted the complex interplay between contract law, corporate insolvency proceedings, and the critical role of financial evidence in legal disputes over business solvency.

If your company is served with a statutory demand, it is imperative that you seek immediate legal advice. Short timeframes apply when responding to statutory demands.

Scroll to Top