Difficulty In Pursuing A Director For Insolvent Trading

“There can be no doubt that the obligations to be placed upon directors of companies are important and ought to be taken seriously…..It is a significant and burdensome obligation”

Mansfield v Townend [2017] NSWDC 370 at [231].

In its recent decision in Townend, above, the District Court of New South Wales found that a director was not liable for insolvent trading.

The plaintiff, in his capacity as Liquidator of Camperdown Bowling & Recreation Club Limited (In Liquidation) ACN 000 248 215 (Company), brought proceedings against Ms Townend (Defendant) for insolvent trading.

In the normal way, the plaintiff Liquidator made a claim under s 588M(2) of the Corporations Act 2001 (Cth) (Act) against the Defendant for recovery of the loss and damage suffered by the Company’s creditors, as a result of her alleged contravention of s 588G(2) of the Act.

In his claim, the Liquidator alleged that, between 1 July 2010 and 20 September 2012, the Company incurred some $190,000 in liabilities whilst it was insolvent.

The Liquidator made the usual allegations, in this case that, during this period;

1. Ms Townend was a director of the Company;

2. the Company was trading insolvent, either by virtue of its financial position, or, alternatively, its failure to keep proper books and records (giving rise to a presumption of insolvency under s 588E(4) of the Act); and

3. there were reasonable grounds for suspecting the Company was insolvent.

4. Ms Townend failed to prevent the Company from incurring the liabilities, in circumstances where;

    a) she was aware that there were grounds for suspecting the Company’s insolvency; and further, or alternatively;

    b) a reasonable person in the circumstances would have been so aware.

Was Ms Townend a director?

A threshold question in the proceedings was whether Ms Townend was in fact a director of the Company at the relevant time.

The Defendant argued that:

- despite the ASIC record and the operation of s 1274B of the Act, she was not a director as she was not validly appointed, there having been no resolution at the Company’s first AGM following her appointment, as is required by s 201H(3) of the Act; and

- she did not act in the position of a director, but merely performed the functions of a “social director” e.g. she was simply responsible for matters such as opening mail, maintaining the membership database and responding to email requests for social bookings;

The Court held that the test under the second limb of s 9 of the Act is an objective one and that the Defendant acted in the position of a director during the relevant times. The main finding against Ms Townsend in this regard was that she signed company documents in her capacity as director; at [171].

Was the Company insolvent?

The Court readily accepted the Liquidator’s submission that the Company was insolvent during the relevant period.

The Court held that the Company was continuing to incur debts whilst insolvent in the period 1 July 2010 to 20 September 2012. The Court further held that the loss calculated by the Liquidator (that being approx. $190,000) was a reasonable measure of the loss and damage suffered for the purposes of s 588M(2) of the Act; [127].

The conclusions were based on both the Liquidator’s opinion based on the financial records that had been obtained and also the presumption provided for under s 588E(4) of the Act; at [120] – [121].

Were there Reasonable Grounds to Suspect Insolvency?

The Court readily held that there were reasonable grounds for suspecting that the Company was insolvent or would so become insolvent by incurring the subject debts; at [184].

The Court held that it was immaterial under this element of the test whether or not the Defendant herself knew about any such circumstances; at [183]. 

Was Ms Townend liable under s 588G(2)?

However, the factors peculiar to Ms Townend were relevant to the next element of the test; that is whether or not a reasonable person in a like position in the Company’s circumstances would have been aware that there were grounds for suspecting insolvency or that the Company would become insolvent by incurring the subject debts.  For the avoidance of doubt, the Court had already determined that there was no evidence that she knew of such circumstances; at [200].

The relevant factors as to her particular position were, at [208]:

- She considered herself to be the social or bowls director of the Company;

- She had no involvement in the financial management of the Company;

- All invoices and bills were passed on to another Company director;

- She did not have access to the Company’s accounts;

- She did not have access to the Company’s online banking computer system;

- She was reassured on occasions by another director that the Company’s financial position was being managed; and

- The other director, seemingly to the exclusion of all others, was responsible for the financial affairs of the Company.

Therefore, the Court held that: “..a reasonable person in a like position to Ms Townsend in a Company in the Company’s circumstance would not be aware of grounds for suspecting that the Company was insolvent or would become insolvent by incurring a debt”; at [227].

Accordingly, the Court made Orders, inter alia, for a verdict in favour of Ms Townsend against the Liquidator and for the Liquidator to pay her costs of the proceedings.

This decision shows the difficulty that can be faced by Liquidators in proving the elements of s 588G(2) of the Act. Even where the Liquidator appears to have a strong claim against a director on the face of the information held by the Liquidator, the reality of the director’s particular role and responsibility within the company can ultimately determine whether the Court is likely to hold the director accountable for creditors’ losses.

Assistance Available

If you are considering your rights in relation to an insolvent trading claim and whether any actions may be appropriate, you should seek advice from the insolvency experts at Gavin Parsons and Associates.

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Date posted: 2018-10-09