Swan Services - NSWSC Insolvent Trading Judgment
Until its collapse in May 2013, the Swan Group operated one of the largest cleaning contract businesses in Australia with approximately 2,500 employees and turnover approaching $90 million.
Justice Black recently delivered judgment in the matter of Swan Services Pty Ltd (In Liq)  NSWSC 1724, awarding damages to the Liquidator, Anthony Elkerton, in respect of an insolvent trading claim for approximately $11 million which the Liquidator contended arose from insolvent trading during the period 1 November 2012 to 22 May 2013 (Relevant Period). The Court also upheld the Liquidator’s claim that certain transactions involving the director’s former wife were voidable.
This CaseFlash focuses on the Liquidator’s insolvent trading claim, though the judgment also provides useful commentary on various issues close to the hearts of insolvency practitioners, including the interpretation and validity of loan and security agreements and de facto director claims. His Honour’s detailed reasoning for declining to accept that the director’s former wife was a de facto director of the relevant companies highlights the difficulties in establishing claims of this nature (particularly where that person is also a creditor of the relevant company). In particular, this CaseFlash looks at two issues considered by his Honour which are common to all insolvent trading claims:
- evidence of insolvency of individual companies within a Group of companies; and
- proving loss and damage (including whether it is necessary to bring into account any anticipated or estimated return to creditors).
1. Evidence of Insolvency
The Liquidator’s task of proving insolvency was made difficult because of the intermingling of assets and liabilities across the companies such that none of them could operate on a standalone basis.
The Liquidator’s evidence on actual insolvency included a Quick Asset Ratio (QAR) analysis which disclosed ratios of less than one throughout the relation-back period, as well as evidence of other indicia such as pressure from creditors and that the Group had no access to alternate funding. In addition, insolvency expert David Lombe provided his opinion on the methodology adopted by the Liquidator to assess the financial position and specifically whether the QAR analysis was an appropriate method to assess the financial position.
The defendants did not lead evidence (expert or otherwise) on the Group’s solvency position. Rather, they sought to attack the findings of the Liquidator and Mr Lombe based on objections to the admissibility of the evidence and submissions, including that the Group’s records upon which the Liquidator’s analysis was based were so unreliable that his evidence ought not to be accepted. His Honour (after noting that those submissions only reinforced the conclusion that the presumption under s588E(4) of the Act is established) accepted the Liquidator’s evidence that the individual companies and the Group were in fact insolvent throughout the Relevant Period.
Factors relevant to his Honour’s finding on the presumption of insolvency included:
- the Group had a long history of delinquency in the preparation of its financial statements;
- the last management accounts available were prepared seven months before appointment;
- the Group had a poor record of compliance in relation to its tax reporting and had significant unpaid and unreported tax liabilities; and
- professional advisers were unable to reconcile the Group’s financial position in the months leading up to its demise.
2. Proving loss and damage
The debts incurred during the Relevant Period were largely debts to the ATO, wages and employee entitlements and amounts owed to trade creditors.
Trade creditor debts
The defendants challenged the Liquidator’s evidence on trade creditor debts on two bases, the first that some creditors had retention of title clauses (although not registered on the Personal Properties Securities Register) and ought to be considered as secured creditors. The second concerned whether particular debts had been incurred in the Relevant Period.
On the first issue, His Honour upheld the Liquidator’s submissions in finding that the relevant loss or damage was suffered by the creditor when its debt became unsecured by reason of the vesting of the security under s267A of the Personal Properties Securities Act.
On the second issue, His Honour found that the Liquidator established that a debt was incurred in the Relevant Period by the tender of an invoice issued for the provision of the service in that period. His Honour did not accept the defendants’ submissions that the Liquidator was required to put into evidence the contractual agreements between the company and each trade creditor.
Before the proceedings had commenced, the Liquidator had successfully recovered approximately $2.5 million from the ATO as an unfair preference payment.
His Honour decided that the Liquidator must, in proving loss or damage, bring to account any anticipated or estimated return to creditors in the relevant insolvencies including the effect of creditors of the recovery of $2.5 million. Until His Honour’s judgment there has been conflicting authorities from appellate courts as to whether a liquidator was required to put forward an estimate of the ultimate dividend that creditors would receive.
His Honour noted the practical challenges involved in this task, including where a liquidator was pursuing a number of unresolved preference claims, but proffered that those matters could be addressed by the Liquidator leading his or her best estimate of recovery in such claims, and costs incurred in them, and it would be open to a defendant to contest that estimate if it sought to do so.
In this case, Counsel for the defendant conceded in oral and written submissions that the defendant was only concerned to address the actual recovery received from the ATO and did not ask the Court to take into account other hypothetical recoveries.
In the absense of such a concession, Liquidators will be faced with the challenging task of putting into evidence his or her best estimate of recovery of all claims and costs to be incurred in them.
TressCox represented the Liquidator in this matter.
Kirsten Farmer, Partner
Manit Oberoi, Associate