Hall v Poolman and the Impact on Liquidators Pursuing Insolvent Trading Claims

Prior to appeal, the decision in Hall and Ors v Poolman and Ors [2007] NSWSC 1330 was cause for concern for liquidators seeking to pursue directors of liquidated companies for insolvent trading and to a lesser extent, preferential payment claims against unsecured creditors; in particular where liquidators had entered into litigation funding agreements to pursue such matters.

Facts:

The Reynolds Group of companies (“Reynolds”) owned a vineyard and winery near Orange, New South Wales.

In August 2003, the Reynolds Wine Group opted to enter into voluntary administration and then subsequently went into voluntary in November of the same year. At the time of Reyonolds entering into liquidation. Secured creditors were collectively owed approximately $30 million, with unsecured creditors totalling around the $99 million mark with no assets available and limited funds on hand. The pool was so dry that there were insufficient funds to cover the costs of the initial voluntary administration. Suffice to say that there was very minimal chance that a dividend would be paid to creditors nor would there be funds to pay liquidators costs.

The Defendants, Peter Poolman and Malcolm Irving acted as Directors of the company between October 2002 and August 2003.

After conducting further investigations into Reynolds, the liquidators sought to persue the Directors of Reynolds. The liquidators entered sought to proceed with having the directors examined and the proceeding litigation under a litigation funding agreement. Despite taking steps to issue proceedings against the directors of Reynolds in the Supreme Court of NSW, it was still highly unlikely that regardless of a successful outcome for the directors, it was still unlikely creditors would be receiving a dividend, or that if there were a dividend available, it would be minimal. Any funds recovered as a result of the litigation would largely go towards covering the liquidator’s fees.

The liquidators mainly sought to claim the following:

• Against Mr Poolman and Mr Irving, loss and damage suffered by creditors as a result of Wines and Vineyards trading while insolvent in the Period, pursuant to 588Mof the Corporations Act 2001 (Cth); and
• Against Mr Poolman, a declaration pursuant to 37A of the Conveyancing Act 1919 (NSW) in respect of the transfer of Mr Poolman’s share in the Fourth Defendant (Kalivise Pty Limited) to the Third Defendant (Constance Poolman) on or about December 2003. The liquidators sought to claim that the alienation was made with the view to defrauding creditors and was as such voidable.

In defence of the Claim, the Defendants sought to argue that under sections 1317S and 1318 of the Act they should not be held liable in circumstances where the majority of the proceeds of the proceedings would go towards the liquidator’s costs and the litigation funders costs. Justice Palmer rejected the argument, however his honour considered that the conduct of the liquidators was such that an inquiry under s536 of the Act was justified.

Notably, his honour stated that the liquidators ought to have known or at least considered what the costs of the proceedings would be and what the potential return to creditors would have been and then subsequently sought directions from the Court under section 511(1)(a) of the Act.

What the decision meant for liquidators:

Whilst the liquidators were successful in some aspects of their pursuit of the Directors; Palmer J’s criticism of the liquidators and the decision to make inquiries into the liquidators conduct under section 536 left the doors open for Defendants to use his honours criticism to threaten liquidators with potential ASIC investigations. As such, this had the potential to leave doubts in the minds of liquidators to pursue insolvent trading claims, and in some instance, preferential/voidable transactions where such proceedings would yield limited benefit to creditors.

The Appeal:

Post Justice Palmers decision, the liquidators felt that his Honour was incorrect in his criticism and sought leave to appeal the decision to the NSW Court of Appeal regarding the section 536 inquiry[1].

The liquidators appealed on a number of grounds including that Justice Palmer did not apply a proper interpretation of s536 of the Act and failed to properly exercise his discretion under that section.

The appeal was heard before Chief Justice Spigelman, Justice of Appeal Hodgson and Justice Austin, who in summary determined the following:

1. Palmer J did not give enough importance to the question of overall public interest in pursuing insolvent trading claims;
2. The Court of Appeal thought that the fact Palmer J indicated that the liquidators ought to have sought directions from the Court before entering into a litigation funding agreement was irrelevant;
3. Liquidators may bring proceedings (even with the assistance of a litigation funding agreement);
4. The liquidators incurred costs in the preliminary stages of their investigations, including holding creditors meetings; and
5. There were still prospective benefits of pursuing their claims for insolvent trading against the directors, which of course, would incur further costs[2];

However, the Court also noted that despite the above points, there are still some provisions liquidators need to follow before pursuing including:  the pre-litigation costs must have been either necessary or reasonably considered to be justified because of the prospective benefits to creditors;  the litigation costs themselves must have been reasonably incurred and proportionate to the prospective benefits (including not only possible direct benefits to creditors but also the benefits derived through the reimbursement of the liquidator’s fees and expenses); and the litigation funding agreement must not be on manifestly unreasonable terms[3].

Most notably, the Court of Appeal determined that the anticipated or potential lack of dividend for creditors is not sole relevant factor that a liquidator needs to consider when deciding whether or not to bring issue proceedings , but rather, it is the anticipated total recovery for creditors that is the more important factor[4].

The Court also noted that there is a public benefit to pursuing insolvent trading claims, given insolvent trading is offence under the Act, and that should threats and implications of improper behaviour be hanging over liquidators, they may be inclined to avoid preliminary investigations[5].

Conclusion:

After the decision of the NSW Court of Appeal, Liquidators can feel safer knowing that it is a lot more difficult for potential Defendants to throw threats of ASIC investigations at them in light of the original Hall & Poolman decision. As mentioned above, although liquidators ought to exercise care when deciding to pursue insolvent trading and preferential payment claims where there is limited prospect of a dividend to creditors coming to fruition (particularly proceedings that may be supported by a litigation funding agreement); ultimately the public benefit and the potential whole benefit to creditors will allow to liquidators to pursue investigations into the behaviour of directors.

Author: Dylan Trickey, Lawyer

Published: March 2016

[1]Hall v Poolman [2009] NSWCA 64

[2] Ibid at 150

[3] Ibid at 151

[4] Ibid at 117

[5] Ibid at 153