Liquidator’s straight wins on appeal after straight losses at trial

Quin v Vlahos [2021] VSCA 205 (28 July 2021)

Kyrou, Kennedy and Walker JJA allow an appeal by a liquidator seeking to establish insolvency and claim insolvent trading debts and unfair preferences.

This is a useful decision dealing with several issues; the availability of third-party funds in the determination of insolvency, whether retention clauses operate to secure debt and unfair preferences.

Roderick Group Pty Ltd (the Company) sold discounted books and had a sole director (the Director). It operated from a building owned by a trust of which the Director was the trustee. As trustee, the Director held a business loan and an associated offset account.

The Company owed several creditors and was placed into liquidation. The liquidator commenced proceedings against the Director claiming that he traded whilst insolvent and that certain payments from the Company to him were unfair preferences.

The primary judge dismissed the proceeding. The liquidator appealed.

Date of insolvency

The liquidator contended that the primary judge erred by not finding that the company was insolvent on either 1 January 2014 or alternatively on 10 April 2014. The Court of Appeal agreed that the Company was insolvent on the earlier date, and said that if it were wrong, it would also find insolvency on the later date.

After accepting that the accounts relied on by the liquidator were, in fact, reliable, their Honours found that it was not necessary to consider whether the funds in the offset account were available to pay the company’s debts to enable a finding of solvency. Such funds, in any event, would have been insufficient to pay the debts due as at 1 January 2014.

Nevertheless, were it necessary to decide, their Honours said they would have found that the Director had failed to discharge his evidentiary onus in respect of the availability of third-party funds, saying (at [139]):

… the position must be considered objectively from the perspective of the relevant company rather than the putative third-party funder. The key question is what degree of assurance does the relevant company have that funds of that third party will be made available to pay existing debts of the company or debts that the company proposes to incur.

Their Honours found that the Company had no such assurance because the Director had an unfettered discretion as to when or if funds in the offset account would be available to the Company.

Their Honours also found that when considering each of the oft-cited indicia of insolvency, enunciated by Mandie J in Australian Securities and Investment Commission v Plymin (2003) 175 FLR 124 – including trading losses, deficiency of assets over liabilities and unpaid debts, tax and superannuation contributions – the Company was insolvent from the earlier date.

Insolvent trading debts – retention of title – surrender of security

As the Court of Appeal found that the Company was relevantly insolvent, their Honours found that on the facts, the Director contravened s 588G of the Corporations Act, by incurring debts when the Company was insolvent, when there were reasonable grounds for suspecting insolvency. The Director was unable to establish a defence under s 588H of that Act.

Next, their Honours considered whether, under s 588M, the liquidator could recover, as a debt due from the director to the Company, in an amount equal to the loss or damage suffered by creditors to whom the debts incurred by the Company whilst insolvent were owed.

Section 588M(1)(c) requires that such debts be wholly or partly unsecured.

Some of the Company’s supplier creditors maintained retention of title clauses in their contracts with the Company – that is, providing that title in the books supplied did not pass to the Company until payment had been made.

The issue was whether such clauses had the effect that the debt owed to the supplier was secured, a question on which their Honours observed that the authorities diverged.

Nevertheless, the Court explained that under the Personal Property Securities Act 2009 (Cth) (the PPSA), a security interest such as that conferred by a retention of title clause is enforceable only if the interest is “perfected” under that Act.

But their Honours found that the creditors with retention of title clauses or registered interests under the PPSA were not secured creditors because the bulk of the books so secured were no longer in the Company’s possession.

Alternatively, their Honours found that the creditors surrendered their securities.

Section 554E provides that a creditor may, among other methods, prove in a winding up by surrendering their security and proving for the whole debt. Then, if the creditor proves as an unsecured creditor, the secured debt becomes an unsecured debt by operation of s 588D.

The authorities established that such surrender by a creditor need not be express and may be inferred. Their Honours found that the fact that the supplier creditors had lodged formal proofs was to be regarded as a surrender.

Their Honours concluded that the liquidator could recover a debt due under s 588M calculated in respect of the debts incurred from the insolvency date of 1 January 2014 in the sum of $705,387.53.

Unfair preferences

The Court of Appeal considered whether the repayments by the Company of loans made to it by the Director were unfair preferences within the meaning of s 588FA.

The liquidator conceded that the repayments (totalling $553,966.06) fell to be considered as a “single transaction” within the meaning of s 588FA(3).

The liquidator gave evidence that the Company had no funds to pay its creditors. On that basis, had the Director proved in the winding up along with all other creditors, he would receive a lesser sum than $553,966.06.

Their Honours concluded that the liquidator could recover that amount of $553,966.06 as an unfair preference.

Their Honours said that it was not necessary to resolve a debate in the authorities as to whether it is necessary to show unfairness or diminution in the value of the assets available to the general body of creditors in order to satisfy s 588FA. This is because their Honours found that the “single transaction” resulted in such a diminution anyway because it depleted the Company’s cash in the bank.