McLellan, in the matter of The Stake Man Pty Ltd v Carroll
 FCA 1415 concerned liability for insolvent trading under s 588G of the Corporations Act. The case applies established principle in finding a breach of the insolvent trading provisions. Significantly, however, Goldberg J ultimately relieved the director from liability under s 1317S of the Corporations Act.
The liquidator of the The Stake Man Pty Ltd (in liquidation) ("the company") applied for orders against its sole director, Mr Carroll under sections 588G and 588M of the Corporations Act. These sections allow a liquidator to recover money from a director where the director has breached the statutory provisions relating to insolvent trading.
The company had operated successfully and profitably for many years processing and wholesaling raw timber. In 2004 the company purchased a kiln and related equipment to enable it to dry and machine its own timber rather than being limited to selling green timber.
Unfortunately, the kiln and related equipment did not function as expected. By mid-2005, the continuing kiln problems were having an adverse effect on the company's cashflow, as were the significant losses suffered because of timber becoming unsaleable through damage in the kiln.
In March 2005, the company engaged a new accountant, Mr Bright, who had experience in the timber industry. In June 2005, Mr Bright told Mr Carroll that the business was close to insolvency and, as a result, both Mr Carroll and the other shareholder, (the Cameron Family Trust) advanced substantial funds to the company. Mr Carroll also approached the kiln manufacturer, Brunner-Hildebrand, to invest in the company but nothing came of that proposal.
In February 2006, the funds invested by the shareholders in July 2005 had been exhausted, and Mr Bright consulted an insolvency practitioner, Mr Marchesi. Mr Marchesi advised Mr Carroll that if he believed that the business was viable, he should find an investor or further capital. Following this advice, Mr Carroll engaged a consultant to help him find an investor in the Company potentially to provide further capital. During April and into May, Mr Carroll was also seeking further avenues of finance for all the Company's business.
On 3 May 2006, the Australian Taxation Office advised Mr Carroll that the company owed it $110,000 and that Mr Carroll had until 17 May to review how he was going to reduce that debt over the next 18 months. On 4 May, Mr Carroll spoke to Mr Bright about this conversation and said that the company did not have the funds on hand to pay the tax bill. On 5 May, Mr Bright gave Mr Carroll the contact details of a restructuring specialist, Mr McLellan. Mr Carroll met Mr McLellan on 7 May, and on 10 May Mr Carroll appointed Mr McLellan as voluntary administrator of the company. On 6 June the creditors resolved that the company be wound up and Mr McLellan became the liquidator of the company.
This case concerned the solvency of the company between 31 December 2005 and 10 May 2006.
Findings on sections 588G and 588H
The court referred to and applied the authorities on the meaning of insolvency, including: Sandell v Porter
 HCA 28; (1966) 115 CLR 666 at 670-1, ASIC v Plymin
 VSC 123; (2003) 46 ACSR 126, at -, Re United Medical Protection Ltd (prov liq appt)
 NSWSC 1031; (2003) 47 ACSR 705 at 718 and Hall v Poolman
 NSWSC 1330; (2007) 65 ACSR 123 at . In particular, the court adopted the broard general guide laid down in the last case that "a director would be justified in 'expecting solvency' if an asset could be realised to pay accrued and future creditors in full within about 90 days."
The court found that the company was insolvent during the relevant period, and that each of the elements of s 588G was satisfied. The court also found that Mr Carroll had not established either of the defences under sections 588H(2) (reasonable grounds to expect solvency) or 588H(3) (expectation of solvency based on reasonable reliance on a competent and reliable person who was responsible for providing him with information).
In relation to the defence under section 588H(2), the court applied the staged inquiry explained by Palmer J in Hall v Poolman at -.
In relation to the defence under section 588H(3), Mr Carroll had argued that he relied on the advice of his accountant Mr Bright. The court found that Mr Bright was engaged by the company as its accountant, but that Mr Bright was not "responsible" for providing adequate information to Mr Carroll about whether the company was solvent in the sense that he was specifically given that role or task. This was notwithstanding that Mr Bright did give advice about whether the company was solvent on various occasions.
Whether Mr Carroll should be excused under sections 1317S or 1318.
These sections give the court power to excuse a director from the contravention of section 588M of the Corporations Act, where the director has acted honestly and, having regard to all the circumstances of the case, he ought fairly to be excused.
In finding that Mr Carroll had acted honestly, the court applied the criteria set out by Palmer J in Hall v Poolman at  which adopt the ordinary meaning of that term.
The circumstances of the case leading to the finding that Mr Carroll ought fairly to be excused included that:
- Mr Carroll was taking advice from Mr Bright during the relevant period;
- Mr Bright told Mr Carroll on several occasions that he did not believe that the company was insolvent
- It was reasonable for Mr Carroll to rely on Mr Bright because of his qualifications and experience and, in particular, his experience in the timber industry. (This was notwithstanding the finding that Mr Bright was not a person to who was responsible for providing information on solvency under section 588H(3));
- Mr Carroll was active throughout the period, taking steps to expand sales and trying to get the kilns working properly;
- Mr Carroll took advice from Mr Marchesi, an insolvency practitioner, who told him that if he believed the company's business was viable it would be necessary to find an investor or further capital, and Mr Carroll attempted to do this; and
- When finally confronted with the ultimatum from the Australian Taxation Office on 3 May 2006, Mr Carroll did not procrastinate. He spoke to Mr Bright the next day, who put him in contact with Mr McLellan and Mr Carroll met Mc McLellan three days later.
The court accordingly found that Mr Carroll should be excused from his contravention of s 588G(2) and that he should be relieved from a liability to pay the plaintiffs the amount of the loss suffered by creditors of the company throughout the relevant period.
This case is significant as a rare instance where a director has been excused from liability under section 1317S. The key factors in the finding that Mr Carroll should be excused were Mr Carroll's reliance on his accountant, Mr Bright, and the fact that Mr Carroll acted promptly on the expert advice he received.
This corresponds with ASIC's draft guidance to directors earlier this month (09-236AD ASIC releases consultation paper outlining proposed guidance to directors on their duty to prevent insolvent trading), that, in seeking to avoid liability for insolvent trading, a director:
- must keep him or herself informed about the financial affairs of the company and regularly assess the company's solvency;
- immediately on identifying concerns about the company's viability, should take positive steps to confirm the company's financial position and realistically assess the options available to deal with the company's financial difficulties;
- should obtain appropriate advice from a suitably qualified person; and
- should consider and act appropriately on the advice received in a timely manner.
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