ASIC v Plymin — The 14 Indicators of Insolvency

Background

ASIC v Plymin [2003] VSC 123 arose from ASIC proceedings against the directors of the Water Wheel group of companies — Water Wheel Holdings Limited and Water Wheel Mills Pty Ltd — alleging breaches of their duty to prevent insolvent trading under section 588G of the Corporations Act 2001 (Cth).

Justice Mandie of the Supreme Court of Victoria was required to determine whether the company was insolvent at the time the relevant debts were incurred. In doing so, His Honour set out a list of 14 indicators that, taken together, may establish insolvency. These indicators have since been widely cited in insolvency litigation and investigations across Australia.

The statutory cash flow test for insolvency is found in section 95A of the Corporations Act. The Plymin indicators provide a framework for assessing whether a company is unable to pay its debts as and when they become due and payable within the meaning of that section.

The 14 Plymin Indicators of Insolvency

The following indicators were identified by Mandie J as relevant to determining whether a company is insolvent. No single indicator is determinative on its own. Rather, they must be considered cumulatively and in the context of the company's overall financial position.

1. 1

   Continuing losses

2. 2

   Liquidity ratios below 1

3. 3

   Overdue Commonwealth and State taxes

4. 4

   Poor relationship with present bank, including inability to borrow further funds

5. 5

   No access to alternative finance

6. 6

   Inability to raise further equity capital

7. 7

   Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply

8. 8

   Creditors unpaid outside trading terms

9. 9

   Issuing of post-dated cheques

10. 10

    Dishonoured cheques

11. 11

    Special arrangements with selected creditors

12. 12

    Solicitors’ letters, summons(es), judgments or warrants issued against the company

13. 13

    Payments to creditors of rounded sums which are not reconcilable to specific invoices

14. 14

    Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts

Holdings

Mandie J held that insolvency is a question of fact to be determined by reference to the company's overall financial position. No single indicator is determinative on its own — they must be considered cumulatively and in context.

The statutory test under section 95A of the Corporations Act — whether a company is able to pay all its debts as and when they become due and payable — is assessed on a cash flow basis.

The indicators have been cited and applied in subsequent decisions, including Hall v Poolman [2007] NSWSC 1330 and ASIC v Edwards [2005] NSWSC 831.