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31 Aug 2016

Insolvent trading claims


4 min

A liquidator won’t take action, what can you do?

Generally, companies are set up to separate and limit the personal liability of the shareholder owners or directors of the company. As many will be aware, liquidators have the power to pierce the corporate veil and pursue the directors via an insolvent trading claim. What many may not realise is that creditors can independently pursue an insolvent trading claim against a director under section 588M of the Corporations Act 2001. The amount recoverable (if successful) is the loss or damage suffered by the creditor however, the creditor must seek the liquidator's consent prior to commencing this action. If the consent is not provided, the creditor may seek leave of the court to proceed with the claim.

Recently, within two weeks of being appointed as liquidators, a creditor requested our consent to commence an insolvent trading claim against the director. If a liquidator does not provide their consent, the creditor can issue a formal notice to the liquidator under section 588S(b) six months after the liquidation date, requesting that the liquidator provide written consent to pursue the insolvent trading action, or provide reasons why the creditor should not be pursuing the claim.

Once this notice is issued, there are three possible outcomes:

  1. The liquidator provides consent and the creditor can pursue the claim.

  2. After three months of receiving the notice, the liquidator does not consent and does not provide any reasons for refusing then the creditor may seek leave of the court to pursue the claim (section 588T(2)).

  3. After three months of receiving the notice, the liquidator does not consent and provides reasons for refusing consent then the creditor may still apply to seek leave of the court, but the court must be provided with the liquidator’s reasons and the court is to consider those reasons in determining whether to grant leave (section 588T(3)).

A liquidator's consent is required to avoid a creditor’s actions from impeding, compromising or otherwise disrupting the liquidation or the liquidator’s right to pursue and recover the insolvent trading claim on behalf of all creditors. The liquidator’s role is to recover assets and claims and distribute them on a 'pari passu' basis in the order of priority set out in the Corporations Act. They act as a representative of all creditors and stakeholders and must take into account all of their interests and not just an individual creditor's interests. An individual creditor’s independent claim and recovery may compromise the assets that may otherwise be available to be distributed to all creditors. Therefore, the most likely reason that a liquidator would refuse to consent would be if they were seeking to pursue those claims on behalf of all creditors.

The purpose of requiring nine months—six months under section 588S(b) and three months under section 588T(2) and 588T(3)—to pass from the liquidation date is to allow the liquidator the opportunity to review and assess the position, and to determine whether any potential claim will be pursued. If after nine months, the liquidator is unable to determine whether an insolvent trading claim may commence, it is very unlikely that they will be pursuing such an action.

In our liquidation, given that only two weeks had passed since our appointment, we respectfully referred them to section 588M and section 588R of the Corporations Act and requested that they contact us again at the six-month mark to enable us time to complete our investigations and determine whether a claim would be pursued. After the six month period lapsed, we gave the creditor our consent to pursue an insolvent trading claim. However, we were advised that they did not end up pursuing the claim themselves.

Creditors and their advisors should consider whether they wish to independently pursue any insolvent trading claim. And if so, consult with the liquidator regarding their intentions to avoid any unnecessary disputes or legal proceedings as a result of refusal of consent.

It should be noted that the recently passed Insolvency Law Reform Act 2016 will also provide liquidators with the ability to assign other statutory causes of action such as preferential payment claims, which will allow significantly more flexibility and options for both insolvency practitioners and creditors to pursue any available claims.

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