Liquidators commonly face problems investigating the affairs of companies with insufficient, or no, books and records. To combat this problem, liquidators have the benefit of certain presumptions pursuant to section 588E of the Corporations Act 2001 (Cth) (Act). However, they generally do not apply when pursuing unrelated parties. Below, we discuss the operation of the presumption of insolvency in voidable transactions claims and what can be done when the presumption does not apply.

Subsection (4) provides that a presumption that the company is insolvent if the company failed to keep proper financial records as required by section 286 of the Act. This, of course, is a handy tool in an action for insolvent trading against company directors. It allows a liquidator to prove insolvency throughout the relevant period (a necessary element of insolvent trading) where much of the evidence that would otherwise be within the hands of the directors.

However, the presumption is not available for certain actions against third parties. Section 588E(7) prevents the liquidator relying on the assumption in voidable transactions proceedings (that is, proceedings under section 588FF of the Act) where the target of that application was not a related entity. An example of this is a claim to recover unfair preferences from one or more the company’s creditors. The rationale is that it would not be fair for third parties to be stuck with being unable to defend such an application on the grounds of solvency where there just isn’t sufficient evidence as a result of the company directors failing to keep, or failing to hand over, books and records to the liquidator.

This issue had been discussed by Gleeson JA in Shaw (as liquidator of ACN 166 338 138 Pty Ltd (in liq) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Ltd [2017] NSWSC 539, where the liquidator had initially sought to rely on the presumption. Ultimately, barely any evidence was before the Court on the question of solvency and his Honour found it was insufficient. His Honour suggested the matters which would be significant in assessing solvency would include:

1. an analysis of outstanding creditors, including “aged payables” at the relevant date the liquidator says the company was insolvent from;
2. a cashflow analysis from the date of alleged insolvency;
3. an assessment of work in progress and any impediments to recovering it from clients/customers.

Although his Honour accepted that the task was made difficult by the failure of the company’s directors to provide books and records, his Honour suggested that the liquidator may have been able to obtain information from various third parties, such as key creditors, bank statements obtained from the company’s banks

A number of years later, in In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232, Rees J commented on the difficulty liquidators face in collecting evidence to establish insolvency:

“[41] The last factor raises a matter that should not be overlooked. Although the onus of proof is on the liquidator, it will commonly be the case that proof is not a straightforward exercise. The directors of the company may be unwilling to give evidence in support of the liquidator’s claim. The books and records of the company may be sub-standard or incomplete. Transactions may have been entered into at a time of financial distress when proper documentation was overlooked. The company may have been poorly managed such that transactions were ill-considered or unconventional.

[42] These difficulties do not shift the onus of proof. But, where there is a paucity of evidence, the Court may draw inferences in order to determine whether the transaction falls within section 588FA(1)(b). …”

Liquidators should bear in mind the frequently cited list of indicia of insolvency set out in Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 46 ACSR 126:

1. Continuing losses.
2. Liquidity ratios below 1.
3. Overdue Commonwealth and State taxes.
4. Poor relationship with present Bank, including inability to borrow further funds.
5. No access to alternative finance.
6. Inability to raise further equity capital.
7. Suppliers placing the company on COD, or otherwise demanding special payments before resuming supply.
8. Creditors unpaid outside trading terms.
9. Issuing of post-dated cheques.
10. Dishonoured cheques.
11. Special arrangements with selected creditors.
12. Solicitors’ letters, summonses, judgments, or warrants issued against the company.
13. Payments to creditors of rounded sums which are not reconcilable to specific invoices.
14. Inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

This list, of course, is inexhaustive.

Where a company’s director fails to provide books and records, liquidators need not give up on pursuing voidable transactions against third parties. There may still be plenty of sources from which to draw useful material to establish, as at the required date, that the company was insolvent.

Contemplating pursuing a voidable transaction? Our team is highly experienced in pursuing complex voidable transactions including where the books and records are insufficient. If you would like to discuss this in more detail, please contact Stefano Calabretta or Luis Ormazabal on (02) 9300 9406.