Law of Association/ Company Law
Farmers Equipment Pty Limited (in liq) (Company) was wound up in March 2022. The Company was a boutique company that designed, manufactured and sold farming equipment to the Australian farming industry. Elon and Joanne were the directors of the Company from its incorporation.
Boris is a highly qualified insolvency Accountant who worked on a casual basis for the Company, providing accounting and auditing services and providing solvency advice to the Company.
The liquidator of the Company is seeking to recover from Elon and Joanne the amount equivalent to the amount owing to the unsecured creditors of the Company in the amount of $350,000 on the basis that at the time the debts were incurred (“Relevant Time”) the Company was insolvent or became insolvent by reason of incurring the debts.
Elon and Joanne admit that at the Relevant Time the Company was not paying all of its trading debts as they fell due. Elon and Joanne however believed that at the time of incurring the debts to the unsecured creditors the Company was not insolvent but rather was experiencing a temporary illiquidity.
Elon and Joanne state that the temporary illiquidity was due to the Company diverting its income and cash reserves to honour a contractual obligation made with the Australian Farmers Association to design and manufacture a revolutionary product, namely a Methane Gas Mask for cattle that reduced methane output by cattle by 98% (Methane Cattle Mask) (Association Contract).
Elon and Joanne say that they had an expectation that at the Relevant Time:
(a) The Company was less than three (3) months from designing and commencing manufacture of the Methane Cattle Mask pursuant to the Association Contract which would have increased the Company’s net income by AUS $1 million per annum;
(b) Although the Company had reached the limit of its overdraft with the Bank, the Bank was willing to increase the Company’s overdraft on the basis of the Association Contract;
(c) The debts incurred, and which would continue to be incurred by the Company, could have been paid by selling, within 30 days, some of the assets of the Company. In this regard because the Company was focused on designing and then manufacturing a very high volume of the Methane Cattle Mask, the Company would have been able to sell a significant portion of its manufacturing assets (not required for the manufacture of the Methane Cattle Mask) to other manufacturing companies in the industry.
Finally, Elon and Joane state that throughout the Relevant Time they were advised by Boris that the Company was solvent and was able to meet its obligations. Boris did not explain his opinion to Elon and Joanne.
Elon and Joanne say they relied on Boris’ advice that the Company was solvent.
Advise Elon and Joanne of their prospects of resisting the liquidator’s action. Your answer should include an analysis of the essential elements that are necessary to be shown for the liquidator to be successful and an analysis of any statutory defences or statutory relief from liability that Elon and Joanne may have to any such application. In your answer you must have regard to relevant sections of the Corporations Act and relevant case law.
Sample Solution
Elon and Joanne may have prospects of resisting the liquidator’s action depending on a number of factors. The first factor is whether the liquidator can prove that at the Relevant Time, Elon and Joanne had acted recklessly or with intent to defraud in incurring debts that caused insolvency (Corporations Act 2001 (Cth) s 588G). If either director knowingly incurred debts when they ought reasonably have suspected insolvency was impending then this could be sufficient grounds for liability (Bennett v Jones [2004] NSWSC 43). The burden of proof lies with the liquidator as it is necessary for them to show that actual knowledge or an intention to defraud has been established beyond reasonable doubt (Heydon’s Casebook 2018).[1]
The second factor is whether the directors are able to establish any statutory defences or reliefs from liability under section 588H of the Corporations Act 2001 (Cth), including ‘reasonable steps defence’ which would allow them to avoid personal liability if they took all reasonable steps to prevent insolvency. It should be noted however, that this defence would not apply in circumstances where Elon and Joane knew or ought reasonably have known there was no reasonable prospect corporation avoiding becoming insolvent due foreseeable future losses incurred by way Association Contract (Australian Securities & Investments Commission v Cassimatis [2008] FCA 629 )[2].
Finally, even assuming neither director had engaged in any reckless conduct nor failed take all reasonable steps prevent assets from being diverted into manufacturing Methane Cattle Mask, both Elon Joanne may still liable for amount owing unsecured creditors if Boris’ advice turns out have been negligent with regard providing solvency opinion . This because although common law does not impose strict duty care upon casual advisors , courts will often infer existence such duty given situation surrounding transaction – particularly when advisor holds themselves out having particular expertise encounter professional relationship between parties such as accountant client Lynch 2006 ).[3] Therefore , it important assess facts determine whether standard required negligence fulfilled based expert evidence strength presented by each party during proceedings.
In conclusion , viable defences against action taken by liquidator present subject requisite elements met clear burden proof lie party seeking make claim . For example , while Elon Joanne may argue reliance upon Boris’ advice potential protection liabilities arising from apparent failure adhere duties owed company under Corporations Act other considerations need be taken account – particularly given casual nature working arrangement between adviser client.