Is this the year Insolvency returns to normal (Part 2)?

Introduction

At start of the year my colleague posited a question to everyone - Would this be the year insolvency returns to normal?

Now that we are almost at the end of the 2023 – the answer to that question now seems to be yes and no.

YES, in terms of the fact that as the year goes on, and all the COVID concessions and rental deferrals are catching up with business owners and tenants, we are finding more and more companies going into Administration or Liquidation.

And NO, in the sense that there have been several significant cases decided by the High Court at the start of the year (see our previous articles) and liquidators seem to be relying on them to go after more and more creditors to seek to get more money back into the liquidation.

Let me explain.  

The statistics

In terms of the numbers (and note we are talking about all types of appointments – Court appointments, voluntary liquidation, administration and DOCAS, controller appointments (by a creditor), and restructurings), in the 2020 financial year there were 10,031 appointments; and in the 2023 financial year there were- 10,377 appointments.  As you can see these numbers are similar and have jumped back up compared to the drops to 6274 and 6477 in the FY21 and FY 22 years).  See below table for the statistics from ASIC:

Australian insolvency statistics (Released 9 October 2023)

Note: Blue shading indicates figures are provisional, refer to INFORMATION SHEET 80: How to interpret ASIC insolvency statistics. Published to the most recently completed month

© Australian Securities &  Investments Commission

Table 2: All appointments over a company including the first, subsequent and transitional appointments–Summary, MONTHLY

General Trends

In our practice, we are seeing liquidators targeting creditors who were paid in the six months prior to liquidation. Those creditors being asked to pay back significant sums of money as an unfair preference payment.  

In addition, we have observed liquidators increasingly putting the onus on the creditor to establish a defence to the claim, rather than exploring and setting out why the payment is a preference payment.

This is despite the fact that, in the Badenoch [1] case, the High Court did away with the peak indebtedness rule (which had been used by liquidators to bolster the amount of the unfair preference clawed back) and clarified how the “running account” or “continuing business defence” is to apply.  

An unfair preference claim by a liquidator can seem unfair, especially if creditor still has a lot owing to it in the liquidation and taking into account that the “set-off” defence no longer applies (as stated in the Metal Manufacturers case).[2]

If you receive a claim from a liquidator, all is not lost - as there are still defences available. These include:

• services or goods for the running of the business throughout and payments to you always go up and down – what you do need to establish here is that the situation remains as per usual, and payments were for what was provided;
• the “good faith” defence – that the party acted in good faith and had no reasonable grounds to suspect the company was insolvent: s 588FG(2) of the Act; and
• the doctrine of ultimate effect.

How Sharrock Pitman Legal can help?

Accordingly, if you receive a demand for repayment of an unfair preference - don't sit on it. Contact a member of our Disputes & Litigation team who can explore whether you have a defence. If so, we can prepare an appropriate response to the liquidator to dissuade them from pursuing legal proceedings against you to recover the money.

Finally, be wary, but not alarmed. Yes, things seem to be returning to normal, but that is not necessarily bad news – but rather a sign of the times. Remember, if you find your business in trouble, or subject to a demand, or you just want to think ahead and take steps to protect yourself from bad creditors, please do not hesitate to contact us on 1300 205 506 or via email at litigation@sharrockpitman.com.au. We're on your side.

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References

[1] Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2

[2] Metal Manufactures Pty Limited v Morton [2023] HCA 1

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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