Prove insolvency, don’t just rely on presumptions
Article written by Matthew Hudson, Manager Queensland
It is a regular occurrence that Insolvency Practitioners have to deal with: a company that goes into some form of external administration, yet despite request the company’s records are devoid of financial records,[1] accounting software or other accounting books. Despite this, the Practitioner must still (amongst other things) identify all possible assets to realise, report to creditors, investigate the company’s pre-insolvency dealings and try to pay a dividend to employees, statutory bodies, and creditors.
Keeping adequate records
Directors have positive obligations to keep adequate accounting records that at the very least could “enable true and fair financial statements to be prepared and audited:” s 286 of the Act. It is a ‘strict liability’ offense to fail to comply with s 286 of the Act. Anna Claessens (of SV Voidables) and I will be exploring the principles associated with this provision in the next aVoidable Issue, following the relatively recent decision of Re Swan Services Pty Limited (in liquidation).[2]
ASIC has published Information Sheet 76, titled ‘what books and records should my company keep?’ and provides a handy list of financial records that the company’s director should keep.
Presumptions of insolvency
Facing the issue of not having sufficient books and records to prove insolvency, a handy provision available to Liquidators is s 588E(4) of the Act, which effectively enables the Liquidator to presume that where s 286 of the Act is breached, the Company was insolvent throughout the period in which s 286 of the Act remained breached. The benefit with this is that the burden of proving the Company’s insolvency, for example: for the purpose of recovering voidable transactions or insolvent trading claims, switches to the defendant director/creditor, such that they would need to prove the Company’s solvency at the relevant time.
(For more information about voidable transactions, insolvent trading claims and indicators of insolvency, please visit our guides in the resources section of our website.)
This is what the Liquidator attempted to do in the recent decision of Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd.[3] The facts of the case are as follows, the:
- Liquidator applied to court seeking orders that various payments totalling $61,420.89 (the monies) be repaid to the Liquidators, as they were said to be unfair preference payments and, therefore, voidable transactions (pursuant to ss 588FA and 588FF of the Act);
- defendant (KPR Recruitment Australia Pty Ltd) (KPR) did not appear at the trial;
- evidence at trial was that on 26 February 2015, KPR issued a statutory demand against ACN 166 338 138 Pty Ltd (ACN 166) for outstanding liabilities totalling $61,420.89. Following the expiry of the statutory demand, KPR filed proceedings seeking to wind-up ACN 166. Before the wind-up occurred, ACN 166 paid the monies to KPR (on 28 April 2015). ACN 166 was subsequently wound-up on 10 December 2015 by another creditor; and
- Liquidator submitted that despite numerous requests to obtain ACN 166’s books and records they had been unable to obtain same, or even get in contact with the director. The Liquidator, therefore, sought to rely on the presumption of insolvency (in s 588E), by reason of the breach of s 286 of the Act, to claw-back the monies as unfair preference payments.
The presumption mistake
Gleeson JA quite rightly pointed to s 588E(7) of the Act to say that the Liquidator could not rely upon a breach of s 286 to presume that ACN 166 was insolvent. Section 588E(7) provides that the presumption is not available where the claim is for an unfair preference and the defendant is not a related party of the Company.
Her Honour pointed to a number of matters that could have been raised by the Liquidator to adduce ACN 166’s insolvency, including an:[4]
- analysis of the aged payable reports at the end of April 2015, and whether those debts remained unpaid thereafter;
- analysis of ACN 166’s cash and other resources at the end of April 2015, including the amount of credit available under the factoring agreement with 180 Capital Funding Pty Ltd (180 Capital); and
- assessment of the value of WIP, and any impediment to the likely realisation of the WIP.
Her Honour also highlighted a number of things that the Liquidator could have done to obtain relevant documents, including, obtaining:[5]
- bank statements from the banks of ACN 166;
- debtors information and the amount drawn on the factoring facility from 180 Capital;
- details of the contract(s) with Lend Lease; and
- any invoices, statements or information from trade creditors.
Despite this oversight, Her Honour has granted the Liquidator a further 14 days (until 19 May 2017) to adduce further evidence on the issue of insolvency. We will endeavour to keep our readers updated if this material is filed.
Takeaway
SV Voidables are regularly engaged to prepare expert solvency and insolvency reports for Liquidators, creditors and directors. A lot of the time, we are briefed to prepare these reports with minimal information available. An example of this situation was a report we prepared last year (which is currently in Court), where we had approximately 8,500 pages of bank statements, ATO material and various source documents from the two liquidated companies’ landlord.[6]
Inspired by Her Honour’s comments on what other information the Liquidator could have obtained, despite the breach of s 286 of the Act, I have provided a table below of the types of documents that could be obtained when proving insolvency. Please note that this table is not exhaustive. I would be happy to hear from readers as to what else you could obtain[7]
To view the How to Prove Insolvency Table click here
[1] The term financial records is defined in s 9 of the Corporations Act 2001 (Cth) (the Act) to include: invoices, receipts, cheques, document of prime entry, working papers that explain the method by which financial statements are made up or adjusted.
[2] [2016] NSWSC 1724.
[4] Ibid, 43.
[5] Ibid, 46.
[6] We had no financial statements or any other documents, which in our view meant s 286 of the Act had not been complied with.
[7] Please note that this table also does not include public examination rights, ss 530A to 530C of the Act rights and other procedural proceeding rights to request documents/information/evidence. If you have any questions about these rights please feel free to contact me.
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