Re Balmz Pty Ltd (in liq) - [2020] VSC 652

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2018 02135

IN THE MATTER of BALMZ PTY LTD (IN LIQUIDATION) (ACN 119 906 642)

STEPHEN JOHN MICHELL in his capacity as liquidator of Balmz Pty Ltd (in liquidation) (ACN 119 906 642)	First Plaintiff
BALMZ PTY LTD (IN LIQUIDATION) (ACN 119 906 642)	Second Plaintiff
v
ANNE ISABELLA PATCH	First Defendant
MELVIN IVOR PATCH	Second Defendant

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JUDGE:	Randall AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	29 July 2019
DATE OF JUDGMENT:	7 October 2020
CASE MAY BE CITED AS:	Re Balmz Pty Ltd (in liq)
MEDIUM NEUTRAL CITATION:	[2020] VSC 652

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CORPORATIONS – External administration – Company trading whilst insolvent – Section 588G of the Corporations Act 2001 (Cth) – Company is presumed to be insolvent pursuant to s 588E(4) of the Corporations Act 2001 (Cth) if it has failed to keep financial records – Directors’ failure to prevent the company trading whilst insolvent – Defences to insolvent trading pursuant to s 588H of the Corporations Act 2001 (Cth) – Section 588GA Safe harbour provisions – Relief from liability under s 1317S of the Corporations Act 2001 (Cth) – Liquidator seeks recovery of compensation from the company directors pursuant to s 588M(2) of the Corporations Act 2001 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr J Kohn	Doherty & Colleagues Solicitors Pty Ltd
The Defendants appeared on their own behalf

TABLE OF CONTENTS

Background......................................................................................................................................... 1

Relevant statutory provisions........................................................................................................ 10

Director’s duty to prevent insolvent trading by company................................................... 10
Section 588G of the Corporations Act 2001 (Cth)............................................................ 10
Section 588H of the Corporations Act 2001 (Cth)............................................................ 11
Section 588GA of the Corporations Act 2001 (Cth)......................................................... 12
Section 588M of the Corporations Act 2001 (Cth)........................................................... 15

Relief from liability under s 1317S of the Corporations Act 2001 (Cth)................................. 15
Books and records....................................................................................................................... 17

The liquidator’s position................................................................................................................ 17

The defendants’ position................................................................................................................ 19

The issues.......................................................................................................................................... 21

Consideration.................................................................................................................................... 22

Solvency........................................................................................................................................ 22
Deemed insolvency........................................................................................................... 22

Actual insolvency........................................................................................................................ 24
When were these debts incurred?................................................................................... 25
Availability of funds......................................................................................................... 27

Defence pursuant to s 588H(2).................................................................................................. 33
Reasonable grounds to suspect the company was insolvent...................................... 33
Did Mrs Patch have a reasonable expectation as to the company’s solvency?........ 35

Other defences under s 588H of the Act.................................................................................. 35
Mr Patch....................................................................................................................................... 36
Section 588GA of the Act........................................................................................................... 37
Section 1317S of the Act............................................................................................................. 38

Conclusion......................................................................................................................................... 40

HIS HONOUR:

This is an application by the first plaintiff (‘the liquidator’) in his capacity as liquidator of the second plaintiff (‘the company’). The liquidator seeks compensation from the first and second defendants, Mrs and Mr Patch respectively, for not preventing the company from trading whilst insolvent.

Pursuant to s 588M(2) of the Corporations Act 2001 (Cth) (‘the Act’), in the event that a director has contravened ss 588G(2) or (3) in relation to the incurring of a debt, the company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2020] VSC 652
Decision Date: 7 October 2020

CaseChat Overview and Summary

The liquidator of Balmz Pty Ltd, a company in liquidation, initiated proceedings against the company’s directors, seeking recovery of compensation under section 588M(2) of the Corporations Act 2001 (Cth). The company was presumed to be insolvent pursuant to section 588E(4) of the Act because it failed to keep financial records. The directors were alleged to have allowed the company to trade while insolvent, contravening section 588G of the Act. The directors argued that they had taken all reasonable steps to prevent the company from incurring further debt while insolvent and relied on the safe harbour provisions under section 588GA of the Act. They also sought relief from liability under section 1317S of the Act.

The court had to determine whether the directors were liable for the company’s insolvent trading and whether the defences and relief provisions applied. The court examined the company’s financial records and the directors’ actions to ascertain if they had taken reasonable steps to prevent insolvent trading. The court also assessed the applicability of section 588H of the Act, which lists defences to insolvent trading, and the safe harbour provisions under section 588GA. The court considered whether the directors could be granted relief from liability under section 1317S of the Act.

The court found that the company was indeed insolvent at the relevant time, and the directors were liable for the insolvent trading. The directors were unable to establish that they had taken all reasonable steps to prevent the company from incurring further debt while insolvent. The court held that the defences under section 588H of the Act did not apply, and the safe harbour provisions were not engaged. Consequently, the directors were liable for compensation under section 588M(2) of the Act. The court ordered the directors to compensate the company for the losses incurred due to their insolvent trading.

The court ordered the directors to compensate the liquidator of Balmz Pty Ltd for the losses resulting from the company’s insolvent trading. The precise amount of compensation was to be determined in subsequent proceedings. The directors were held liable for breaching their duty to prevent the company from trading while insolvent.

Orders