The changing face of voidable transactions and insolvent trading claims
On 28 March 2017, the Australian Treasury released, for public consultation, the draft Bill containing (amongst other things) the proposed ‘Safe Harbour’ laws (the safe harbour laws), which are said to be coming into effect by the end of 2017. The Explanatory Memorandum accompanying the safe harbour laws argues that “current insolvent trading laws put too much focus on stigmatising and penalising failure” and that the safe harbour laws will provide protection for directors where they undertake reasonable restructures, subject to a number of rules.
The purpose of this article is not to delve into the safe harbour laws as they are still subject to public consultation and finalisation. Rather, it is instead worth pointing out that a number of important recent decisions have been handed down by various Courts, which in our view have had, and will continue to have, a greater impact on voidable transactions and insolvent trading claim recoveries.
(For further information on voidable transactions and insolvent trading claims, please visit our dedicated guides by clicking on the respective hyperlinks.)
Our SV Voidables team are reporting in the next four editions of The aVoidable Issue (the AI) on what these decisions are and how they impact on directors, creditors, insolvency practitioners, lawyers and other stakeholders. The purpose of this article is to summarise the main points from those articles and encourage interested stakeholders to subscribe to the AI. The AI is a free subscription to our monthly newsletter, dedicated to all things voidables, insolvent trading, director duties and proving-up solvency.
The AI #5: prove insolvency, don’t just rely on presumptions
The recent decision of Shaw v KPR Recruitment Australia (the Shaw case) highlighted the difficulties faced by insolvency practitioners when seeking to claw-back voidable transactions (in the form of unfair preference payments) in circumstances where the liquidated company has no, or limited, books and records.
The issue that arose in the Shaw case was the Liquidators reliance on a breach of s 286 of the Corporations Act 2001 (Cth) (the Act) to presume that the liquidated company was insolvent for the purposes of ss 588E(4) and 588FC of the Act.
In short, s 286 of the Act requires the directors of the liquidated company to keep sufficient books and records (for example: financial statements, ledgers and trial balances, employee information, and creditor information), the failing of which can mean (in some circumstances) that the Liquidator may be able to rely upon the presumptions of insolvency (found in s 588E(4) of the Act). For further information on s 286 of the Act, please see paragraph 2 of this article.
The AI #5 deals not only with why the Liquidator could not rely upon the presumption of insolvency, but also provides a table that lists a number of avenues in which the Liquidator could have looked to source further information to piece together the liquidated company’s insolvency.
For more information and a detailed explanation of these issues, please see a full copy of this article by clicking here.
The AI #6: ensuring adequacy of company financial records
It is a regular occurrence for Practitioner’s that once appointed to a company (as Liquidators, Administrators, etc) they are left with minimal records about the company, how it had traded, who its employees were, where its assets are located and when it might have become insolvent.
To try and protect against this, the Act prescribes in section 286 that the directors of the company must keep adequate financial records for 7 years; the failure to do so is a ‘strict liability’ offence, meaning that ASIC could prosecute. We say ‘try’ because it can be quite difficult to discern from the Act what the words “adequate financial records” means.
Fortunately, Black J recently provided us with some guidance on this issue in Re Swan Services Pty Limited (in liquidation) (the Swan Services Case), where His Honour described the test of compliance with s 286 of the Act in terms of the following: upon a review of all of the evidence, whether (as a matter of fact) the company had any records (at all) that meet the definition of ‘financial records’ in s 9 of the Act, such that:
- if they did not, then the company would be in breach of s 286 of the Act; or
- if they did, whether it is possible to produce accurate financial records (that explain the transactions, financial position and performance of the company) and ultimately enable true and fair financial statements to be prepared and audited.
The AI #7: limiting the scope of Hussain v CSR Building Products
Edelman J’s decision in Hussain v CSR Building Products raised a number of brows, not only for its opening sentence but also in its dealing with a myriad of technically difficult issues relating to unfair preference payments. One of these issues was whether an unregistered retention of title could meet the definition of a secured debt for the purpose of defending an unfair preference claim, which the Court confirmed.
(For more information about what is an unregistered retention of title or a secured debt, please visit our guide to voidable transactions or click here to see a full copy of our article.)
In making His Honour’s decision to conclude that the UROT were secured debts, two main issues were considered:
- an unsecured debt is not defined in s 588FA(1)(b) of the Act and, therefore, by adopting the broad interpretation found in General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd, s 588FA(1)(b) of the Act could encompass a UROT; and
- treating UROT as securing a debt is consistent with the 2010 amendments to the Act. His Honour considered that as the credit agreement between the company and the defendant creditor was entered into on 26 September 2010, the UROT would be regarded as a transitional security agreement in line with the PPSA (ie between 30 January 2012 and 30 January 2014).
Our article goes on to explain, why in our view the Hussain v CSR Building Products case can be distinguished from cases brought in respect of voidable transaction or insolvent trading claims post-transitional period. To read why, please click here to see a full copy of our article.
The AI #8: calculating insolvent trading claims (a new perspective?)
In our experience, industry practice has shown that when calculating the value of an insolvent trading claim, Practitioners tend to rely on quantifying the quantum of unpaid debts incurred on and from the date the liquidated company was determined to be insolvent (the quantum of creditors approach).
The Swan Services case potentially challenges the quantum of creditors approach, by adding a number of extra layers to the calculation. In examining this issue, Justice Black held that Liquidators:
- must deduct any recoveries received in the Liquidation from the quantum of creditors approach;
- must account for, and deduct, any anticipated future recoveries from the quantum of creditors approach; and
- can possibly add back their fees and costs associated with achieving these recoveries.
Although it is unclear how these changes will practically work and what other elements need to be added to, or subtracted from, the quantum of creditors approach, our article explores this calculation in more detail and provides a handy table on how this could be achieve. You can see a full copy of this article by clicking .
Takeaway
In the world of voidable transactions and insolvent trading claims, we have found that although things may have been done the same way for a long time, it pays to be vigilant and to question the current (status quo) approach to recovering or defending these claims.
SV Voidables are experts at litigation support services and in recovering/defending voidable transactions and insolvent trading claims. For more information about us please visit our website, or to get in touch, please contact one of our experts.
Article written by Matthew Hudson, Manager, Queensland
Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Cth). For more information about these reforms, see: http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2017/NISA-Improving-corporate-insolvency-law.
Explanatory Memorandum, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, 5 http://www.treasury.gov.au/
Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd NSWSC 539.
See also Woodgate v Fawcett NSWSC 868; Re SSET Constructions Pty Ltd (In Liq) – Sims v Khattar NSWSC 102; Fisher v Divine Homes Pty Ltd NSWSC 8, 24.
Section 588G of the Act imposes an obligation on directors of a company to prevent insolvent trading. Section 588M of the Act allows for recovery of compensation for loss resulting from insolvent trading. This right extends to creditors who have suffered a loss as a result of the director trading the company whilst insolvent.