In the recent decision of Re Swan Services Pty Limited (in liq)  NSWSC 1724, Justice Black of the New South Wales Supreme Court held that a liquidator must, in proving loss or damage for the purpose of section 588M of the Corporations Act 2001 (Act), bring to account any anticipated or estimated return to creditors in the relevant insolvencies.
This represents a significant shift from the longstanding interpretation since the South Australian Supreme Court’s decision in Powell & Duncan (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer & Perry  SASC 59 (Powell’s Case), in which we acted for the liquidators. The decision creates a practical challenge for liquidators seeking to recover compensation for loss or damage resulting from insolvent trading.
In this edition, we examine Justice Black’s decision and what it means for liquidators and insolvency administrators.
Swan Services Pty Limited (Swan Services) operated one of the largest contract cleaning businesses in Australia at the time that administrators were appointed to them in May 2013.
Following its subsequent winding up, the liquidator brought a claim for insolvent trading pursuant to section 588G of the Act against Robert Swan, a director of Swan Services, and Judith Swan (on the basis of an allegation that she was a de facto director of Swan Services).
Justice Black found the defendant directors to have contravened section 588G of the Act and went on to consider how the Court should quantify the “loss or damage” for the purpose of section 588M.
Justice Black was asked to consider whether any amount recoverable against Mr and Ms Swan should be reduced by the recovery of a $2.5 million unfair preference payment that the liquidator had recovered from the Deputy Commissioner of Taxation prior to the commencement of the proceedings (Unfair Preference Payment).
Meaning of “Loss or Damage”
Justice Black noted that the authorities were divided as to the question of whether the “loss or damage” will be the quantum of relevant unpaid debts.
He considered the 2001 decision in Powell’s Case. The defendant directors had argued that the relevant loss or damage was not the amount of the unpaid debt in each instance and that it was necessary for the Court to examine each individual debt and make various potential abatements of it. However, the Full Court of the South Australian Supreme Court disagreed with that submission and held that the “loss or damage” in question will normally be the quantum of relevant unpaid debts, on the basis that the submission flies in the face of the plain intention of the legislation, per Olsson J.
Justice Black has departed from the decision in Powell’s Case on the basis that, “the concept of “loss and damage” adopted in the section seems to require that account be taken of matters that will reduce the amount of that loss or damage, including recoveries by the liquidator that will allow a distribution to creditors, and that result is consistent with fairness so far as it does not result in the defendant, in a claim under section 588M of the Corporations Act, being required to compensate for loss and damage which will not be suffered once other recoveries are made.”
Justice Black held the recovery of the Unfair Preference Payment, and the fact that the ATO will be entitled to proof in the liquidation for the amount repaid, should therefore be taken into account in determining the loss or damage recoverable by the liquidator.
As a result of Justice Black’s decision, liquidators are required to quantify the amount of loss or damage by taking into account recoveries in the liquidation – including future recoveries.
To overcome this practical challenge, liquidators seeking to recover compensation for loss or damage resulting from insolvent trading will need to lead evidence as to:
- Successful recoveries in the liquidation;
- Estimates of future recoveries;
- Assets in the liquidation; and
- The anticipated costs of the liquidation.
The decision makes effecting recoveries in this area ever more difficult – and problematic – than at present.
Our Adelaide Office (David Colovic) is on a Law Council of Australia subcommittee presently considering a submission to effect legislative change in the area.
This article was written by Courtney Johanson, Solicitor and David Colovic, Partner in our Adelaide office. Publication Editor: Grant Whatley.