Insolvent trading claims and the pitfalls of inadequate particulars!
Posted on January 20, 2023
Liquidators often face a similar conundrum: how do you prove an insolvent trading claim when you don’t have any books and records?
The Liquidator in the January 2023 decision of Copeland in his capacity as liquidator of Skyworkers Pty Limited (in Liquidation) v Murace [2023] FCA 14 (Skyworkers) recently encountered the consequences of that conundrum.
Facts & issues
Proceedings were issued by the Liquidator against the director seeking orders in relation to:
- breaches of directors duties. This claim was subsequently abandoned by the Liquidator; and
- the director’s failure to prevent the Company from trading while insolvent.
To establish the Company’s insolvency, both the presumption of insolvency under s 588E(4) of the Corporations Act 2001 (Cth) (Act) (on the basis that the Company failed to keep and maintain financial records), and the Company’s actual insolvency were asserted.
As for the quantum of the insolvent trading claim, the Liquidator’s pleadings contained a table of the Company’s creditors and their corresponding debt. That table did not disclose the date upon which, and how, each debt was incurred by the Company.
The director, Mr Murace, took issue with the Liquidator’s claim and sought that it be struck out, or in the alternative that the claim be summarily dismissed, on the basis that the Liquidator had failed to provide proper particulars of:
- the debts which comprised the insolvent trading claim, such that it was “not possible for him to plead and rely on the defences provided in s 588H and s 588GA” of the Act;
- the company’s failure to keep and maintain financial records; and
- the company’s actual insolvency.
Consideration
As many Liquidators and insolvency professionals will no doubt find, providing fulsome particulars is, in some instances, impossible where a company has little or no financial documents available. The position was no different in Skyworkers.
In respect of the first ground raised by Mr Murace, the Liquidator contended that the information pleaded was “the best that could be provided given that Mr Murace had not produced any other books or records of the Company”. While the Court sympathised with the Liquidator’s “practical difficulties”, it nevertheless confirmed that insolvent trading claims must provide details of the dates which, and how, debts were incurred and that insufficient particulars had been provided.
As for the contention that the Liquidator failed to provide particulars of the Company’s presumed insolvency, the Court also agreed with the director on this ground. In particular, the Court noted that in order to rely upon the presumption of insolvency, the failure to keep records must have had one or more of the following consequences:
- failure to correctly record and explain transactions;
- failure to correctly record and explain the company’s financial position;
- failure to correctly record and explain the company’s financial performance;
- failure to enable true and fair financial statements to be prepared;
- failure to enable such statements to be audited.
The Court held that the Liquidator’s claim failed to identify “which of the five possibilities…are advanced”, and so failed to provide property particulars of the presumption of insolvency.
As for the Company’s actual insolvency, the Court did not agree with Mr Murace’s contentions, and held that sufficient particulars had been provided by the Liquidator in this respect.
The Court ultimately ordered that the entire claim be struck out, but was not prepared to summarily dismiss the Liquidator’s claim. Instead, the Court granted the Liquidator leave to file an amended claim.
Unfortunately for the Liquidator, the deficiencies in the pleadings resulted in a cost order being made in favour of Mr Murace not only for his costs “thrown away”, but all costs incurred by Mr Murace since the proceedings were commenced.
Take aways
The decision in Skyworkers is another example of how important it is for Liquidators and insolvency professionals to take a holistic view to any potential claim, especially when legislative tools, such as presumptions of insolvency, are used.
Lynch Meyer Lawyers’ Insolvency and Restructuring Team are experienced in advising on and prosecuting insolvent trading claims and other voidable or director-related claims. If you require assistance with any insolvency matter, please contact Lynch Meyer Lawyers’ Insolvency and Restructuring Team.
