Rebutting the Statutory Presumption of Insolvency: Substance, Commercial Reality and Cogent Evidence

Introduction

The statutory demand regime under the Corporations Act 2001 (the Act) plays a central role in insolvency proceedings, particularly as a mechanism enabling creditors to apply for the winding-up of a company.  Where a creditor serves a valid statutory demand and the company fails to comply within the prescribed 21-day period, a rebuttable presumption of insolvency arises under s 459C of the Act.  This presumption may then be relied upon by a creditor to commence winding-up proceedings within three months of the date of non-compliance with the statutory demand.  While the presumption is not conclusive, it places a significant evidentiary burden on the company to demonstrate that it is in fact solvent – that is, able to pay its debts as and when they fall due.  To do so, the company must adduce persuasive evidence of its financial position, often described in the authorities as the “fullest and best” or “cogent” evidence.

Re World Digital Gold Bullion Pty Ltd [2026] VSC 403

The recent Supreme Court of Victoria decision in Re World Digital Gold Bullion Pty Ltd [2026] VSC 403 illustrates how this evidentiary burden operates in practice, particularly where a company seeks to rely on external or related-party funding to establish solvency.

Background

The decision arose from a winding-up application initially filed by Chase Melbourne Pty Ltd on 21 November 2025, with AWD Alliance Pty Ltd later substituted as the plaintiff.  The Court also extended the statutory timeframe for determination of the application pursuant to s 459R of the Act.

The application was supported by four creditors, who were owed more than $900,000 collectively.  These creditors were associated with Mr Chang Loong Lee, a former director of the defendant company, whose removal in May 2025 followed a dispute with the remaining director, Mr Khong Soon Lim.  Following that dispute, Mr Lim became the sole director despite not ordinarily residing in Australia, contrary to s 201A(1) of the Act.  The Court noted this contravention as part of the broader factual matrix, although it was not determinative of solvency.

Recently, the defendant commenced Federal Court proceedings against Mr Lee, the plaintiff, a former director of the plaintiff and each of the supporting creditors.  In those proceedings, the defendant alleged that the debts relied upon in the winding-up application either did not exist or were liable to be set aside due to alleged breaches of directors’ duties, misleading or deceptive conduct, and other statutory contraventions.

However, it was common ground that the defendant failed to comply with a statutory demand, and therefore the presumption of insolvency arose.  The central issue became whether that presumption could be rebutted.  The parties agreed that this question depended entirely on whether the defendant could rely on external funding from a related entity, Quantum Metal Recovery Inc (QMRI), and whether those funds were genuinely available.

Issues

The Court was required to determine:

1. whether the defendant had rebutted the statutory presumption of insolvency by establishing that it was solvent; and

2. if not, whether the Court should exercise its discretion to refuse to wind up the company to allow it to pursue the Federal Court proceedings. 

Decision

The Court held that the defendant had failed to rebut the presumption of insolvency and ordered that the company be wound up.

Reasoning

The defendant’s solvency case relied almost entirely on access to a related-party loan facility of approximately $2 million from QMRI, with about $1.5 million available for drawdown.  It submitted that this funding was sufficient to meet all of the company’s liabilities, including those that were disputed in the Federal Court proceedings.  While the Court accepted that the facility was legally binding and sufficient in quantum, it emphasised that this was not determinative.

The key question was whether the funds were “genuinely and realistically available as a matter of commercial reality”, consistent with established authority that access to external funding must be assessed in a practical, business-like way rather than by reference to legal form alone.

In examining that question, the Court scrutinised QMRI’s financial capacity.  It found that QMRI’s assets were primarily shares that were heavily encumbered and that its ability to fund the facility depended on third-party financing arrangements.  The evidence regarding those arrangements was incomplete and raised significant uncertainty, including:

1. a lack of direct evidence from the third-party lenders as to their willingness or capacity to advance further funds;

2. inconsistencies as to whether funds previously advanced were actually received by QMRI; and

3. insufficient material demonstrating that further funding could be accessed when required.

The Court also emphasised that QMRI’s shares were subject to security interests in favour of third-party lenders, limiting their practical utility as a funding source.

The Court held that this fell short of the requirement to provide cogent evidence.  It rejected any meaningful distinction between “cogent” evidence and the requirement to provide the “fullest and best” evidence, noting that any difference was negligible, if it exists at all.  Rather, the inquiry is whether the evidence is sufficient to satisfy the Court of the asserted fact, having regard to the nature, context and circumstance of the case.

In the context of external funding, this requires evidence of sufficient persuasive quality to demonstrate, in a practical and commercial sense, that the company has the capacity to access those funds.  Whether described as “cogent” or “fullest and best”, the focus remains on whether the evidence establishes that funding is genuinely available in the particular circumstances of the company.

The defendant also argued that the Court should exercise its discretion to refuse winding up in light of the Federal Court proceedings challenging the debts.  The Court rejected this submission, noting that the proceedings were at an early stage and that allowing the company to continue posed unacceptable risks to creditors.  It further observed that any claims could be pursued by a liquidator, who would act in the interests of creditors.  The Court also aligned its reasoning with authorities emphasising that such discretion will only be exercised in rare or compelling cases.

Significance

This decision provides a clear and practical reminder of the strict evidentiary burden imposed on companies seeking to rebut the statutory presumption of insolvency.  In particular, it reinforces that where solvency depends on external or related-party funding, the Courts will look beyond the existence of contractual rights and examine whether funds are genuinely available in a commercial sense.

The case highlights the importance of cogent evidence – that is, evidence which is clear, reliable and capable of demonstrating that funding is real, accessible and immediately deployable.  Where funding arrangements depend on multiple entities or contingent financing, each element must be supported by probative material capable of withstanding scrutiny.

More broadly, the decision confirms that courts will be reluctant to permit an insolvent company to continue operating or avoid winding up merely because it wishes to pursue litigation, particularly where creditor protection remains uncertain.  Consistent with authorities such as Bungey, TD Preece and Reform Projects, such discretion will only be exercised where there are compelling and well‑supported circumstances.

If you require advice or further information in relation to any of the matters discussed in this article, please contact our Litigation & Dispute Resolution team on 03 5273 5273.