Australia: TGIF 28 June 2019: Insolvent Trading: is the privilege against self-incrimination available and how is liability split between successive directors?

This week's TGIF considers a recent insolvent trading claim involving novel questions in relation to privilege against self-incrimination and the apportionment of liability between successive directors.


Substance Technologies Pty Limited (the Company) operated a scrap metal yard at Cooma in New South Wales. The Company ceased trading in 2013 following a series of disputes with several companies, and filed its last tax return the same year.

In early 2014, the Company agreed to purchase scrap metal from a company called Ausgrid, which issued five invoices to the Company totalling $78,463.

In April 2015, Ausgrid commenced recovery proceedings against the Company. The ATO also wrote to the Company advising that it intended to take debt collection recovery in relation to $23,869.96 then owing.

In late 2015, Ausgrid obtained judgment against the Company and issued a statutory demand, which the Company failed to comply with. The Company was then ordered to be wound up on 27 June 2016.

The liquidator filed proceedings against the Company's directors, Christopher and Andrew Thaler, alleging that the debts owing to the ATO and Ausgrid were incurred while the Company was insolvent.

Issues for Determination

The Court ultimately found that the liquidator had made out the insolvent trading claim and ordered the directors to pay compensation to the Company in respect of the ATO and Ausgrid debts.

Two novel questions arose for consideration by the Court:

  1. Whether the directors could assert a valid claim of privilege against self-incrimination to prevent a presumption of insolvency arising on the basis that the Company had failed to maintain and keep financial records in accordance with its statutory obligations; and
  2. Whether any liability for insolvent trading should be apportioned between the two directors to reflect their different periods of directorship.

Privilege Against Self-Incrimination

At the time the Company was ordered to be wound-up, Mr Andrew Thaler was the Company's sole director. The liquidator made multiple requests for Mr Thaler to provide the Company's books and records, which Mr Thaler did not comply with.

The liquidator asserted that the Company had failed to comply with its obligations to retain financial records for a period of 7 years. If established, this would lead to a presumption under s.588E(4) of the Corporations Act that the Company was insolvent in respect of the 7-year period preceding the appointment of the liquidator.

Andrew Thaler submitted that the Company did hold financial records in a storage unit in Cooma. However, the directors had not provided them to the liquidator, nor adduced any evidence in the proceeding about the keeping and retention of those records, on the basis that the records could incriminate them.

As to whether such a privilege claim could be validly invoked in response to a request for books and records made by a liquidator under s.530A of the Corporations Act, the Court considered that it was likely that the privilege had been abrogated by the Act (although the Court ultimately concluded that it was unnecessary for it to decide the issue in this case).

As to whether the privilege claim prevented the Court from concluding that the Company had failed to keep and retain financial records in accordance with the Act, the Court proceeded on the assumption that the privilege was available and could be invoked (but without making any positive determination on the issue). Although it was not permissible for the Court to draw any adverse inferences as a result of the privilege being invoked, that did not prevent the Court from relying upon the other evidence that was before the Court. Here, there was ample evidence for the Court to infer that the Company had failed to comply with its obligations, including that: (i) the Company's accountants did not have any tax returns and financial records beyond the financial year ended 2013; (ii) the Company had failed to lodge tax returns or BAS statements after 2013; and (iii) at no time had Andrew Thaler asserted a claim of privilege against self-incrimination in response to the requests for books and records made by the liquidator. The Court therefore concluded that the presumption of insolvency had arisen.

Apportionment of Liability

The Court then had to determine the amount of compensation to be paid by each director, in circumstances where the Company had a series of directors during the period of insolvent trading.

Christopher Thaler was the Company's sole director from 8 September 2004 to 3 January 2015. During this period, the Company incurred the debts to both the ATO and Ausgrid. Andrew Thaler subsequently became the sole director of the Company from 2 January 2015.

While the debts to both the ATO and Ausgrid had been incurred while Christopher was director of the Company, each debt increased during the period of time when Andrew was subsequently director of the Company.

The Court decided that each director was liable for the debts incurred during his directorship, and that increases in the debts incurred by Christopher while Andrew was director of the Company would be paid by Andrew.

Key Messages

While the Court did not make any definitive findings as to whether the privilege against self-incrimination can be invoked in cases such as this, it seems unlikely that it would be a valid basis to refuse to comply with a liquidator's request for books and records. Even if the privilege can be asserted in Court proceedings, that does not absolve a director from their burden to prove on the balance of probabilities that a company kept and maintained books and records in accordance with its statutory obligations nor does it prevent the Court from deciding the issue based on other available evidence.

In cases where a company has traded whilst insolvent, this case serves as a reminder that there is a need to focus upon when, and under whose watch, the debts were incurred to see if there is any need to split liability between directors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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