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Supreme Court 23 November 2007

Hall & Ors v Poolman & Ors

[2007] NSWSC 1330

Other
INSOLVENCY RELATED COMPANIES WHETHER COMPANIES INSOLVENT INSOLVENT TRADING DIRECTORS’ LIABILITY INSOLVENT TRADING

Citation: Hall & Ors v Poolman & Ors [2007] NSWSC 1330
Court: Supreme Court of New South Wales (Equity Division)
Date: 23 November 2007
Judge(s): Palmer J

Background

Two related companies in the wine industry, referred to here as Wines and Vineyards, were placed into liquidation. The liquidators commenced proceedings against the companies' directors (including a Mr Irving and a Mr Martini) alleging insolvent trading under the Corporations Act 2001 (Cth). The Australian Taxation Office (ATO) was also joined as a party in connection with payments made by the companies to the Commissioner, which were alleged to be unfair preferences.

The proceedings raised questions about whether the companies were in fact insolvent during the relevant period, whether the directors had reasonable grounds to suspect insolvency, and whether any discretionary defences were available to excuse liability. A further issue arose from the transfer by one director of his share in a company to his wife, which the liquidators alleged was a fraudulent alienation under s 37A of the Conveyancing Act 1919 (NSW).

Complicating the proceedings was the fact that the liquidators had entered into a litigation funding agreement. Palmer J found that the liquidators were aware, or should have been aware, that the great majority of any recovery would flow to the litigation funder and the liquidators themselves, leaving creditors with little or no dividend.

  • Whether each company was insolvent during the relevant period, having regard to disputed tax debts and trade debts
  • Whether a company's solvency could be assessed independently of a related company's solvency
  • Whether a disputed tax debt was "due and payable" for the purposes of the insolvency analysis
  • Whether the directors had reasonable grounds to suspect insolvency, and were aware of those grounds
  • Whether discretionary relief was available under s 1317S(2) and s 1318(1) of the Corporations Act, and whether s 1318 applies to insolvent trading contraventions at all
  • Whether the directors acted "honestly" for the purposes of those discretionary provisions
  • Whether the ATO's receipt of payments constituted unfair preferences, and if so, whether the ATO was entitled to an indemnity from the directors
  • Whether the directors had rights of equitable contribution against each other in respect of their common insolvent trading liability
  • Whether a director's transfer of his share in a company to his wife was an "alienation" within s 37A of the Conveyancing Act intended to defraud creditors
  • Whether the liquidators' conduct in entering the funding agreement and proceeding without court direction warranted an inquiry under s 536 of the Corporations Act
  • Whether the negligible return to creditors was relevant to the exercise of discretion under s 1317S and s 1318

Decision

Insolvency. Palmer J found that both companies were insolvent during the relevant period. The court rejected the argument that each company's solvency should be assessed by reference to the other's financial position. On the tax debt issue, the court considered whether disputed tax amounts were "due and payable," finding that certain debts did qualify as debts for insolvency purposes even where objections or appeals were on foot.

Directors' liability and defences. The court found that the directors had reasonable grounds to suspect insolvency, and that at least one director was aware of those grounds. Palmer J granted partial relief to Mr Irving under both s 1317S and s 1318 of the Corporations Act, but only up to a specific date (5 February 2003). After that date, the companies should not have been trading at all, and exoneration was refused for the period beyond it. The court confirmed that both s 1317S and s 1318 are available in insolvent trading cases, following the reasoning of Bergin J in Kenna & Brown and the approach of Spigelman CJ in Deputy Commissioner of Taxation v Dick. To attract relief, a director must have acted "honestly," and the court treated that requirement as a substantive threshold, not merely a formal one.

Unfair preferences and contribution. Payments made by the companies to the ATO during the relevant period were found to be unfair preferences. The court addressed the consequential question of indemnity and set-off between the ATO and the directors, and considered equitable contribution principles as between the directors themselves in respect of their shared insolvent trading liability.

Fraudulent alienation. The transfer by one director of his share in a company to his wife was examined under s 37A of the Conveyancing Act 1919 (NSW). The court considered the meaning of "alienation" under that provision and whether acts by a person other than the debtor could be caught. Palmer J's findings on this claim were linked to the outcome of separate proceedings against the wife (proceedings No 4870 of 2005), which were stood over pending the formulation of short minutes.

Liquidators' conduct and costs. Palmer J ordered an inquiry under s 536(1)(a) of the Corporations Act into the liquidators' conduct. The court was concerned that the liquidators had entered a litigation funding agreement and commenced expensive proceedings knowing that creditors were likely to receive little or no return, and had done so without first seeking the court's directions. Costs questions were reserved pending the outcome of that inquiry.

Orders Made

No orders were made in this decision.

Key Takeaways

  • Both s 1317S and s 1318 of the Corporations Act are available to provide discretionary relief in insolvent trading cases; Palmer J confirmed that s 1317S(7) requires s 1318 to be read as if s 1317S did not exist, meaning s 1318 operates independently and covers contraventions of s 588G.

  • Discretionary relief under those provisions requires that a director acted "honestly," and the court will consider all circumstances, including the limited or nil return that litigation will produce for creditors, when exercising its discretion.

  • A liquidator who enters a litigation funding agreement and commences proceedings while knowing that creditors will receive negligible benefit, and without first seeking the court's directions, may face a formal inquiry into their conduct under s 536(1)(a) of the Corporations Act.

  • The solvency of related companies is assessed independently; the financial position of one company in a group does not automatically inform the solvency of another.

  • Under s 37A of the Conveyancing Act 1919 (NSW), the court examined both the meaning of "alienation" and whether acts of a person other than the debtor themselves can be impugned, confirming that the provision's reach requires careful analysis of who carried out the relevant transfer.

Legislation and Cases Referenced

Legislation
- Corporations Act 2001 (Cth): ss 95A, 553, 553C, 588FC, 588FE, 588FF, 588FG, 588FGA, 588FGB, 588G, 588H, 588J, 588K, 588M, 588U, 1317S, 1318, 511, 536
- Conveyancing Act 1919 (NSW): s 37A
- Civil Procedure Act 2005 (NSW): ss 21, 56, 60, 98
- Taxation Administration Act 1953 (Cth): Pt IVC, ss 14ZZM, 14ZZR
- Income Tax Assessment Act 1936 (Cth): ss 177, 204(1), 208, 209
- Administrative Appeals Tribunal Act 1975 (Cth): s 43(6)
- Bankruptcy Act 1966 (Cth): ss 58(3), 82(2), 86

Key Cases
- Deputy Commissioner of Taxation v Dick [2007] NSWCA 190
- Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430
- Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304
- Scott v Williams [2002] SASC 424
- Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191
- Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213
- Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 80 ALJR 1441
- Lewis v Doran (2004) 50 ACSR