Directors of a company and its holding company held liable for the same insolvent trading debts

Giovanni Maurizio Carrello (as liquidator of Perrinepod Pty Ltd (in liq)) v Perrine Architecture Pty Ltd & Ors¹ 

The plaintiff is the liquidator of Perrinepod Pty Ltd (PPL). 

The first defendant, Perrine Architecture Pty Ltd is the holding company of PPL.

Mr and Mrs Perrine, the second defendants, formed the first defendant in 1989 and have been the sole directors and shareholders at all times.

PPL was then formed in 2007 with the purpose of marketing a construction system designed by Mr Perrine.

Mr and Mrs Perrine were directors of PPL from its formation along with two other directors.  By 2008, PPL had only 3 directors, two of which were Mr and Mrs Perrine.

The first defendant was ordered to be wound up on the ground of insolvency on 1 March 2012.  

The plaintiff asserted that (among other things):

·         Mr and Mrs Perrine failed to prevent PPL incurring debts while insolvent; and

·         the first defendant, as holding company of PPL, was liable for the insolvent trading of PPL.

As the directors of the first defendant, which was the holding company of PPL, were also directors of PPL and it was PPL that incurred the debts, it followed that if Mr and Mrs Perrine were liable for insolvent trading under section 588M of the Corporations Act 2001 (Cth) (Act), the first defendant would be liable under section 588W of the Act. 

As stated by Chaney J at [7]:

Whether any losses suffered by creditors are recoverable on the basis of insolvent trading requires a determination as to whether, at the time particular debts were incurred, PPL was insolvent and there were reasonable grounds for suspecting that it was, at that time, insolvent.

Chaney J concluded at [173] that PPL was insolvent as from 16 July 2010.

Chaney J found, for various reasons set out in his judgment, that the only invoices to which Mr and Mrs Perrine would be liable for failing to prevent insolvent trading were the first defendant’s rental invoices, management fees, professional services, employee services and disbursements as well as an amount paid to PricewaterhouseCoopers totaling $1,354,911.85.

Decision 

At [172], Chaney J stated that he did not accept Mr and Mrs Perrine’s evidence that they believed that PPL was solvent during the period between 16 July 2010 until PPL was ordered to be wound up on the grounds of insolvency (Insolvent Trading Period).  Chaney J stated:

They were both fully aware of PPL’s inability, either from its own resources or from any external resources, to meet its outstanding liabilities after July 2010.  They were fully aware of PPL’s financial position and of the grounds to suspect insolvency from July 2010 onwards.

Mr and Mrs Perrine were the directors and controlling minds of the first defendant, the holding company of PPL, when PPL incurred the debts referred to above.  As such, Chaney J was satisfied that the first defendant was also liable for the same insolvent trading debts as the second defendants, Mr and Mrs Perrine.

A large portion of the debts incurred by PPL while insolvent were debts owed to the first defendant holding company.  Chaney J’s decision resulted in the first defendant being held liable for insolvent trading for debts that were owed to the first defendant by PPL.

Effectively the first defendant has not only suffered the loss of the unpaid debts but now must compensate the plaintiff for those losses.

Chaney J made the following comments, at [222] in relation to the “harsh outcome”:

Here, the effect of the sections is that, not only does the holding company suffer the loss, but it must then pay the amount of its loss to the liquidator.  It therefore suffers the loss twice, less whatever proportion of the original loss might be recoverable as a dividend in the liquidation.

Chaney J continued:

Notwithstanding that that might be thought a harsh result, it is the effect of the relevant provisions of the Corporations Act as I construe them.  The object of the recovery by a liquidator, although measured in terms of loss to a creditor, is not an action for the benefit of that creditor or to compensate that creditor specifically.  Rather, the successful claim for insolvent trading by the liquidator is directed to the benefit of the creditors as a whole.  The scheme of the Act is to discourage trading by corporations while insolvent and to impose liabilities on those who are in a position to prevent that happening but fail to do so.

Chaney J held that section 588Y of the Act further supports the above argument.  Section 588Y provides the Court with the power to order that any amount paid to the company be made unavailable to pay that creditor’s debts until such time as all of the company’s unsecured debts are paid in full.

Chaney J held that the defendants were liable for the debts incurred during the Insolvent Trading Period.  Further, Chaney J made an order pursuant to section 588Y of the Act that the amount paid by the defendants not be available to pay the debts of PPL to the first defendant unless all of PPL’s other unsecured debts have been paid in full.