Can related party funding stave of proof of insolvency?

“My business is not insolvent,” remarked Jess. “My husband or I could put in our own money should the business need it.” But is that correct? When can you rely upon such funds to stave off insolvency?

Many people that come to see me make similar remarks as Jess.

They say they could have just sold their car, taken out a personal loan or not drawn a director wage, etc.

However, here are some key points for Jess to consider first:

(1) What is the degree of commitment? Can you demonstrate an historical willingness to provide the funds? (SMG v Sholz & Chan v FSDC cases)

(2) The degree of commitment must be continuous. (ICM v Rodrick)

(3) No point providing the funds to stave off insolvency if you will call for their repayment within a 12 month period. Otherwise, you are effectively replacing one current liability with another. (Harrison v Lewis & ASIC v Edwards cases)

(4) The commitment must be supported by Jess having a “genuine and realistic availability” of equity or money to meet it. (Lewis v Doran & Expile v Jabb’s cases)  

(5) The funds must be of a sufficient amount. (Chan)

(6) Has the corporate veil been pierced (eg director guarantees), such that Jess must anyway indemnify the business for some of the liabilities?

Your feedback is welcome!


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