Liquidators beware! The necessity of properly particularising a claim for insolvent trading

Liquidators are often restricted in the level of detail that can be provided to support certain claims by the limited and incomplete records available upon liquidation of a company, particularly insolvent trading claims. The recent Federal Court decision in Copeland in his capacity as liquidator of Skyworkers Pty Limited (in Liquidation) v Murace [2023] FCA 14 (Skyworkers) is a reminder that the obligation to properly particularise a claim in insolvent trading remains despite those challenges and of the consequences for insolvency practitioners when a claim is made without adequate particulars.

Background

The Defendant, Mr Murace, was the sole director of Skyworkers.  The Liquidators of Skyworkers filed a claim for insolvent trading pursuant to s 588G and s 588M of the Corporations Act 2001 (Cth) (the Act) against Mr Murace, which pleaded that Skyworkers was presumed to be insolvent by reason of a failure to keep financial records (s 588E(4) of the Act) and, alternatively, was actually insolvent (s 95A of the Act).

Mr Murace filed an application for summary dismissal and alternatively to strike out the statement of claim (in full or in part) on the basis that:

• In relation to s 588G of the Act, the statement of claim did not plead the dates on which debts were alleged to have been incurred or how the debts were incurred.
• The allegation that Skyworkers failed to keep financial records in relation to a period as required by ss 286(1) of the Act or failed to retain financial records for the period of seven years required by ss 286(2) of that Act, required to support the presumption of insolvency pursuant to s 588E(4) of the Act, was not adequately particularised.
• The allegation that of insolvency pursuant to s 95A (of actual insolvency) lacked adequate particulars.

Those were the three key issues considered by the Court.

Consideration

Justice Halley relied on and upheld the reasoning of Parker J in Devine v Liu; Devine v Ho (2018) 338 FLR 208; [2018] NSWSC 1453 (Devine).

Director’s Duty to prevent insolvent trading - s 588G of the Corporations Act

Section 588G applies where a person is a director of a company at the time when the company incurs a debt and the company is insolvent at that time or becomes insolvent by incurring that debt and there were reasonable grounds for suspecting that the company was insolvent, or would become insolvent, as the case may be.

A director will contravene the section if they fail to prevent the company from incurring the debt and they (or the reasonable person in the position of that director) were aware at the time there were grounds for suspecting that the company was insolvent or would become insolvent, as the case may be. 

In his statement of claim the Liquidator listed roughly 40 debts totalling $4,478,016.88 that were said to have been incurred (as liquidator’s commonly do) between a certain date range of about two years.

The Liquidator submitted that the pleading should not be struck out because evidence had not yet closed and the information in the statement of claim represented all the information that was available in the Xero accounting software used by Skyworkers.  He submitted that, in the circumstances, the detail pleaded was the best that could be provided given that Mr Murace had not produced any other books or records of Skyworkers.

Mr Murace contended that he was prejudiced by the failure of the Liquidator to plead the specific dates each debt arose and the circumstances giving rise to each debt as he could not be sure of the case he had to meet. In particular, Mr Murace submits that the absence of dates means it is not possible for him to plead and rely on the defences provided in s 588H and s 588GA of the Act as those sections require consideration to be given to specific circumstances at the time each debt arose.

The Court, relevantly, held that:

• Whether evidence is closed or not does not excuse the need to plead essential elements of a cause of action.
• Nor does any inability or failure to identify essential elements of a cause of action, irrespective of the reasons for that inability or failure, relieve a plaintiff seeking to pursue a claim from pleading sufficient material facts to establish the necessary elements of a cause of action.
• The practical difficulties confronting liquidators in pleading and providing adequate particulars of insolvent trading cases, given the often incomplete and limited financial records of companies provided to them, are readily understandable. It is not sufficient, however, to identify only the creditor and the amount of the debts the subject of the alleged insolvent trading. 
• If a liquidator seeks to bring proceedings for insolvent trading, it is essential for them to identify the date or dates at which the debt was incurred and how it is alleged the debt arose. It is not an answer to those requirements to contend that the information is not available.  If a liquidator does not know when a debt was incurred and how it arose, it would seem axiomatic that the alleged debt could not be relied upon for the purpose of an insolvent trading claim.

Particulars of presumed insolvency claim

The Liquidator pleaded, inter alia, that Skyworkers failed to keep financial records as required by ss 286(1) and/or 286(2) for the whole of a stated two year period and is therefore deemed insolvent pursuant to s 588E(4).   

It was contended by Mr Murace that s 588E(4) of the Act is not contravened simply because Skyworkers failed to maintain financial records over a period of time. The failure to keep records must have had one of the consequences specified in the section. There are at least five possibilities. Skyworkers may have failed to keep financial records which:

1. correctly recorded and explained it transactions over the period, or
2. correctly recorded and explained its financial position over the period, or
3. correctly recorded and explained its financial performance over the period, or
4. would enable true and fair financial statements for the period to be prepared, or
5. would enable such statements to be audited.

It was submitted, and accepted by the Court, that proper particulars of the presumed insolvency allegation would require the identification of which of the five alternatives are relied upon and, for each alternative, the particular records whose absence is relied upon to sustain the allegation.

As the statement of claim did neither, it was held to be deficient.

Actual Insolvency Claim pursuant to s 95A of the Corporations Act

The Liquidator pleaded that Skyworkers was insolvent within the meaning of s 95A of the Act from 3 July 2017 to 21 August 2019 because it was unable to pay its debts as and when they fell due for payment along with a number of the other usual indicia of insolvency.   

Mr Murace submitted that the particulars of the actual insolvency pleaded in the statement of claim was nothing more than “a boilerplate list of potential indicia of insolvency” without any particular application to Skyworkers.

The Court held that unlike a claim of presumed insolvency, actual insolvency does not require further particularisation. To sustain the allegation requires establishing that the company is unable to pay its debts as and when they fall due. This would not usually require particularisation as to the dates of the alleged insolvency but would be a matter of evidence.

Conclusion

His Honour did not award summary judgment but did order that the statement of claim be struck out in its entirety. 

The Liquidator submitted that the appropriate costs order was that Mr Murace should only have his costs thrown away as a result of the amendments to the statement of claim.  The Court disagreed and awarded Mr Murace his costs from the commencement of the proceeding, including cost of the application.

The Liquidator was granted leave to re-plead the claim conditional on the payment of Mr Murace’s costs, as agreed, or if not agreed, on a lump sum basis by a Registrar of the Court. His Honour noted the costs incurred by Mr Murace had effectively been wasted as the Liquidator, to put it colloquially, will have to start again.

Key-takeaways

Liquidators in preparing a claim for insolvent trading often plead generally or with reference to date ranges in relation to the dates upon which debts were incurred.  They often do not plead how the debt arose at all.  This case highlights the need to plead, with particularity, the dates upon which debts arose and how they arose. 

Similarly, in relation to the presumption of insolvency, it is necessary to identify which of the five alternatives are relied upon and, for each alternative, the particular records whose absence is relied upon to sustain the allegation of presumed insolvency.

There is a need to plead detailed particulars.  If you do not (notwithstanding the obvious difficulties faced by liquidators in doing so) the principles are clear - a statement of claim deficient in those particulars is liable to be struck out.