A CSD can be served in reliance upon a judgment debt or, in the absence of a judgment, with a supporting affidavit setting out the nature of the debt.
The effect of serving a CSD is that, if the debtor company fails to comply with the demand, or apply to set it aside, within 21 days then the debtor company is presumed to be insolvent. This allows the creditor to apply to wind up the debtor company and appoint a liquidator.
The creditor applied to wind up the debtor company. Whilst the winding up proceedings were on foot in the Supreme Court of NSW and before those proceedings were listed for hearing, the debtor company brought an application in the District Court of NSW (where the underlying judgment was made) to set aside the judgment. The debtor company was successful in setting aside the judgment.
The debtor company then argued, in the winding up proceedings, that it was an abuse of process for the creditor to maintain the winding up proceedings in circumstances where the underlying judgment had been set aside.
The situation would have been different had the debtor company filed an application to set aside the CSD within the 21-day period, on the basis that there was a pending challenge to the underlying judgment. However, that did not take place.
Once the presumption of insolvency had arisen, and in deciding whether to wind up the debtor company, the Court must only consider whether the debtor company has discharged its onus to rebut the presumption of insolvency by reference to reliable evidence.
In the matter of Wetherill Park Holdings Pty Ltd, the debtor company argued that, while it was in default of its loan obligations to secured creditors of more than $30 million, it had the support of those secured creditors as they were willing to defer payment for the purposes of allowing the debtor to complete a large-scale property development, and were also willing to fund the construction costs of the development.
After considering the financial evidence available to it and applying the cashflow test of insolvency, the Court found that the debtor company was "woefully insolvent" and that the secured creditors did not necessarily have the financial resources required to support the property development.
The debtor company was wound up and a liquidator was appointed.