(Creditors’ right to pursue an insolvent trading claim)
“I’m owed money…. I want to have a go at the directors for insolvent trading” Joe Supplier (creditor). The oft heard catchcry of the unsecured creditor at the start of a liquidation.
Well, yes you can, subject to certain restrictions and conditions.
But the ball starts in the liquidator’s court.
The first right of recovery goes to the liquidator, who has ‘first bite’ of the action for effectively the first nine months. This is to allow the liquidator ample opportunity to review and assess the position, and determine whether they wish or are able to pursue any insolvent trading claim.
But Section 588M of the Corporations Act also gives creditors the right to individually (or with other creditors) recover compensation for insolvent trading. Sections 588R to 588U set out the procedure and timing for creditors being able to commence their own proceedings, and what consent they may or may not need.
Firstly, a creditor cannot begin proceedings if that creditor’s debt is involved in another action (Section 588U). Thereafter, the creditor either needs consent of the liquidator, or failing that, court consent.
The creditor’s starting point is to ask the company’s liquidator for written consent to bring proceedings under Section 588M. If the liquidator consents, then the creditor is free to commence action.
If the liquidator refuses, or fails to respond, the creditor will have to wait six months from the commencement of the winding up.
After six months, the creditor can invoke Section 588S i.e. give formal notice to the liquidator of intent to bring proceedings and ask the liquidator to give within three months a) written consent or b) written reasons why they do not give consent.
Again, if the liquidator gives consent at this stage, the creditor is off and running.
But if the liquidator either ignores the notice or refuses and gives reasons the creditor does not accept, then after three months of the creditor giving formal notice, the creditor can make an application to court for leave to commence proceedings.
In conclusion, any creditor seriously considering using Section 588M should firstly obtain robust, commercial legal advice (such actions are rarely a ‘slam dunk’) and secondly, consult with the liquidator to avoid unnecessary disputes or legal proceedings.
April 2019