An easy win? Obtaining summary judgment in the absence of the Defendant

In the matter of Squirrel Limited (In Liquidation), the Court considered an application for summary judgement against a director for insolvent trading. In doing so, the Court considered the principles underpinning a director’s duty to prevent insolvent trading and the compensation payable as a result.

Background

The first plaintiffs, Mr Brent Kijurina and Mr Richard Lawrence, were the joint liquidators (the Liquidators) of the second plaintiff, Squirrel Limited (In Liquidation) (the Company). The Company had three directors: Steven Fornasaro (first defendant), Damien Linn (second defendant) and Stuart Adamson (third defendant).

The Liquidators commenced proceedings against the directors by way of originating process. They sought declarations that the Company’s directors had contravened section 588G(2) and orders pursuant to section 588M(2) of the Corporations Act 2001 (Cth) (the Act) requiring the directors pay to the Company an amount equal to the loss and damage suffered by creditors as a result of the contravention of the Act.

A settlement was reached between the plaintiffs and the first and third defendants and a Notice of Discontinuance was filed in relation to the proceedings against them.

The second defendant was personally served with the originating process and points of claim in New Zealand. However, he did not file a Notice of Appearance, or a Defence nor did any legal representative appear on his behalf at any of the interlocutory hearings.

By interlocutory process filed on 22 March 2021, the plaintiffs applied for summary judgment against the second defendant pursuant to rule 13.1 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) seeking:

1. a declaration that the second defendant contravened s 588G(2) of the Act by failing to prevent the Company from incurring specified debts during the period from October 2018 to October 2019;
2. judgment against the second defendant pursuant to s 588M(2) of the Act in the sum of $447,714.90, being the amount of loss and damage said to have been suffered by the Company’s creditors in relation to the debts referred to in paragraph 1; and
3. interest.

Summary judgment

In order for the plaintiffs to obtain summary judgment against the second defendant, the Court had to be satisfied that the plaintiffs’ claims would ultimately succeed because there was no underlying defence, or, if there was a possible defence, any such defence had no more than a fanciful prospect of success, such that the outcome was so certain that it would be an abuse of the Court’s process to allow the action to go forward.

The plaintiffs’ submissions were directed to whether the second defendant had reasonable prospects of defending the proceedings and whether it was reasonable to conclude that the Company had incurred the relevant debts whilst it was insolvent. Further, that the second defendant was aware that the Company was insolvent at those times.

The elements of s 588G(2) of the Act may be summarised as follows:

1. the company incurred a particular debt or debts;
2. the company was insolvent when the debt or debts were incurred;
3. there were at that time reasonable grounds for suspecting that the company was insolvent;
4. that time was after the commencement of the Corporations Act;
5. the defendant director failed to prevent the company from incurring the debt; and
6. the director was aware at that time that there were grounds for suspecting that the company was insolvent, or a reasonable person in the director’s position would have been so aware.

In accordance with section 588M of the Act, the liquidator may recover from the contravening director an amount equal to the loss or damage suffered by the company’s creditors in relation to the unsecured debts that the director failed to prevent the company from incurring. That amount may be recovered by the liquidator from the director as a debt due to the company.

The Liquidators alleged that the Company was insolvent from at least 1 October 2018. Among other things, the plaintiffs relied upon an expert report from Mr John Vouris, a chartered accountant. Mr Vouris analysed the Company’s records which revealed that, during the period from 31 July 2018 to 30 June 2019, the Company’s income was manifestly insufficient to meet its current liabilities. Additionally, the Company’s liquidity ratio was below one (indicating insolvency) for the 2015 to 2019 financial years.

The Court found that the evidence demonstrated with a high degree of certainty that a reasonable person in the second defendant’s position would have been aware of the Company’s limited revenue, its net losses during 2018 and prior financial years, and its inability by mid-2018 to pay a significant proportion of its trade creditors within 90 days. Additionally, a reasonable person in the second defendant’s position would have been aware of these matters from a basic understanding of the nature of the Company’s business and annual financial statements.

The second defendant failed to prevent the Company from incurring the unsecured debts totalling $130,114.12 and each of those debts were incurred at a time when the Company was insolvent. Further, there were reasonable grounds for suspecting so. The Court was ultimately satisfied that the evidence adduced by the plaintiffs established, with the requisite degree of certainty, that the plaintiffs’  claim against the second defendant would succeed in respect of some of the debts and that the second defendant had no defence to the claim.

Orders

Summary judgment was granted, and the Court ordered:

1. the second defendant contravened s 588G(2) of the Act by failing to prevent the Company from incurring debts totalling $130,114.12 in the period after 1 October 2018;
2. judgment against the second defendant in the sum of $130,114.12 pursuant to section 588M(2); and
3. pursuant to section 100 of the Civil Procedure Act 2005 (NSW) the second defendant pay interest on the amount of the judgment.

Key takeaway

The following factors will assist plaintiffs in obtaining summary judgment in insolvent trading claims:

1. providing the Court with detailed evidence about the debts incurred;
2. tendering expert evidence regarding indicia of the Company’s insolvency, including insufficient cash at bank to meet liabilities and a liquidity ratio below 1; and
3. tendering evidence to prove that the director failed to prevent the company from incurring debts and that those debts were incurred at a time when the company was insolvent.

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Authored by:

Scott Couper, Partner
Isabelle Quinn, Associate