Background triangle
Limebite 02/22

Liquidators as insolvency specialists need insolvency specialist lawyers

The recent decision of Cribb v Kingsbury (No 2) [2021] FCA 1397 emphasises how insolvency professionals, both liquidators and solicitors, are best placed when working together to ensure that the appropriate strategies are employed in litigation, that there is the necessary evidence to discharge the onus on the Liquidator in that litigation and to maximise a successful outcome for the benefit of creditors of the Company in liquidation.

Background

 On 13 June 2017, the Liquidator was appointed as the liquidator of the Company by the  Australian Tax Office (ATO) for outstanding tax obligations. The Company operated a wholesale bakery in the Pilbara, WA.

The Liquidator commenced proceedings against one of the directors, Company Director A, and another company under Company Director A’s control (which A was also the largest related party creditor and a shareholder) for insolvent trading, breach of directors’ duties, voidable transactions and debt recovery. Proceedings were not commenced by the Liquidator against the other director, Company Director B nor were Public Examinations of the Company conducted prior to the commencement of the subject litigation.

Company Director A had no knowledge of the operation of the Company’s business and instead operated as its financier along with his related company while the day-to-day operations were left to Company Director B. Company Director B had intentionally withheld information about the Company’s financials including the mounting debt owed to the ATO, which had been serviced by a variety of payment plans that Company Director B had negotiated. Company Director A had also taken no steps to independently review the books or records of the Company.

Decision

The Court rejected all of the Liquidator’s claims, which amounted to $1.5million, stating that he had not established any part of the case and that the claims should not have been brought. The Court also awarded adverse costs against the Liquidator in favour of Company Director A (and his related company) due to the unsuccessful litigation.

Relevantly, the Liquidator had adduced his own evidence relying upon the oft-cited “insolvency indicia” of ASIC v Plymin, but prepared as a “tick and flick” exercise rather than applying the circumstances of the Company to those indicators and providing detailed evidence on the Company’s insolvency. This was unfortunate, particularly when the Court observed in the judgment it was “not…a temporary lack of liquidity…[but] rather [the Company] suffered from endemic insolvency”.

The lawyers for Company Director A (and the related company) adduced evidence from an independent expert, evidence which was favoured by the Court because it presented a more reasonable assessment of the actions of Company Director A, who was a “silent director.” The Liquidator’s “insolvency evidence” was quickly undermined by the defence as they adduced evidence which demonstrated that:

  • at all times, the Company had the funds to meet any debt of the Company as it fell due and relied on numerous examples of this occurring throughout the life of the Company;
  • although the Company made rounded sum payments, 90% of these were to the ATO, payments which Company Director B had intentionally hidden from Company Director A;
  • the only special arrangement for creditors was with the ATO, again to which Company Director A was misled;
  • prior to June 2016, the Company had 90% of its creditors (excluding the related company of Company Director A and the ATO) aged 30 days or less; and
  • overall, Company Director A took reasonable steps to inform himself of the financial affairs of the Company and was misled by Company Director B, to which the co-director admitted.

Based on the independent expert evidence, to which the Liquidator did not challenge on cross-examination as there was no alternate independent insolvency expert evidence led by the Liquidator, the Court accepted that the insolvency indicators relied on by the Liquidator were refutable and the Company was therefore not insolvent until the date Company Director A resigned. Naturally, this was fatal for the Liquidators’ claims against Company Director A.

Takeaways

Liquidators (and their lawyers) should also always give consideration to mandatory and discretionary examinations pursuant to sections 596A and 596B of the Corporations Act 2001 (Cth), which serve as a useful evidentiary tool to explore the availability of prospective claims by a company in liquidation and fill in the inevitable factual gaps in any claims to be brought by Liquidators in their appointments. Public Examinations do not appear to have been contemplated in this case.

Insolvency practitioners are very familiar with many elements of the Corporations Act 2001 (Cth) due to the specialist space that they practice; however, insolvency lawyers are experts at assessing the “evidence”, which enables Liquidators to take advice and make a more informed decision around the difficult concept of “knowledge”, a key ingredient in many prospective claims that the Liquidator considers in their appointment. If the Liquidator had the benefit of that assessment in this case, the Liquidator’s strategy may well have been altered and avoided the risk and trap of costs being both awarded against the Company (in liquidation) and the Liquidator for the failed litigation.

Liquidators and lawyers work hand in hand to bring prospective recovery actions on behalf of a Company in liquidation before the Court to maximise a successful return to creditors of the Company.

Gilchrist Connell’s experienced Restructuring and Insolvency team works alongside Liquidators to provide industry leading specialist insolvency advice and a holistic approach to achieving the best return for creditors. Where appropriate, we run public examinations in to both narrow lines of enquiry to complex group structures together with extracting the relevant documents, evidence and information to enable liquidators to meaningfully analyse a company’s insolvency and apply the ASIC v Plymin insolvency indicia. We are also able to assist Liquidators in their litigation funding applications and also advise on the appropriateness of obtaining independent insolvency evidence for the purposes of contemplating litigation.

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.