In February 2010, Hall J of the NSW Supreme Court heard an appeal regarding proceedings brought by a creditor of an insolvent company, for recovery from a director for loss resulting from insolvent trading under s 588M(3) of the Corporations Act 2001 (Cth) (Act).
A point at issue in Zappia v Grant Baines Transport Pty Ltd  NSWSC 98 was the requirement that the creditor obtain the liquidator’s written consent in order to commence such proceedings. Significantly, proceedings were commenced before the company was even in liquidation.
Mr Zappia was a director of Zaps Logistics Pty Ltd (Zaps), a company which eventually went into liquidation. Grant Baines Transport Pty Ltd (GBT) was a creditor of Zaps, which sought to recover its debt from Mr Zappia personally by operation of s 588M(3).
Proceedings were commenced against Mr Zappia on 16 March 2006 at a time when Zaps was still in administration. Although liquidation was surely on its way, this did not occur until 7 September 2006.
Also on 7 September 2006, Mr Sleiman, the liquidator, wrote to GBT and purported to authorise GBT to commence proceedings against Mr Zappia. This letter was held, as a matter of fact, to contain the consent presupposing a creditor’s right to action against a director. The following day, GBT filed an amended statement of claim, seeking recovery from Mr Zappia for the debts of Zaps under s 588M(3).
Pursuing a director under the Act
In order for a creditor to pursue a director for loss resulting from insolvent trading, s 588R(1) of the Act must be satisfied:
(1) A creditor of a company that is being wound up may, with the written consent of the company's liquidator, begin proceedings under section 588M in relation to the incurring by the company of a debt that is owed to the creditor.
The company’s liquidation is a precondition to a creditor ‘begin[ning]’ proceedings. Thus, it was not until Zaps went into liquidation on 7 September 2006 that GBT gained a cause of action against Mr Zappia. Applying this section, Hall J found that ‘[t]he consent of the liquidator had not, and could not, have been obtained.’
A solution in the Civil Procedure Act
Despite the fact that GBT’s original claim did not have a valid cause of action, Hall J allowed the successful claim by deeming valid an amendment to the GBT’s statement of claim, made under the NSW Civil Procedure Act 2005 (WA). Under s 64(3) of that Act, the Court may authorise amendments which in effect add or substitute a cause of action.
Hall J held that proceedings were on foot when consent was eventually obtained, despite the fact that the original statement of claim had a major defect. Applying Quick v Stoland (1988) 87 FCR 371, it was held that these proceedings only became those pursuant to the relevant s 588M of the Act after consent had been given. Referring to the purpose and object of s 588R(1), it would be unnecessary to apply a restrictive construction which would require a new application being made.
In short then, despite the fact that GBT commenced an action before the winding up, and without the liquidator’s consent, it was able, with the benefit of a procedural ‘leg-up’ to continue proceedings against Mr Zappia for loss resulting from insolvent trading.
For further information please contact partner Alison Robertson on (08) 9288 6872 / email@example.com.