Walton & Anor v ACN 004 410 833 Limited (Formerly Arrium Limited) (In Liquidation) & Ors

The High Court of Australia considered an appeal concerning the interpretation of section 588G of the Corporations Act 2001 (Cth), which imposes a duty on directors to prevent a company from incurring debts when it is insolvent. The appeal arose from proceedings brought by the liquidators of Arrium Limited (in liquidation) against former directors of the company, seeking to recover debts incurred during the period of alleged insolvency. The primary dispute revolved around whether the directors had breached their statutory duty under section 588G, and consequently, whether they were personally liable for the company's debts under section 588M.

The central legal issues before the High Court were: (1) the proper interpretation of the phrase "reasonable grounds to suspect" in section 588G(2)(a) of the Corporations Act, particularly in the context of a company's financial position; (2) the standard of care and diligence required of directors when assessing a company's solvency; and (3) the application of the defence available under section 588H(2) to directors who claim they had reasonable grounds to expect the company was solvent. The court was asked to determine the threshold for a director's knowledge or suspicion of insolvency and the extent to which directors could rely on information or advice provided by others.

The High Court clarified that "reasonable grounds to suspect" requires more than mere possibility; it necessitates an actual suspicion formed on grounds that a reasonable director would have considered sufficient. The court emphasised that directors have an active duty to inquire and not to shut their eyes to obvious signs of insolvency. It was held that the defence under section 588H(2) would not be available if directors failed to make reasonable inquiries when faced with information that would reasonably lead them to suspect insolvency. The court affirmed that the assessment of solvency must be based on a realistic appraisal of the company's financial position, taking into account all relevant circumstances.