As a defence to an insolvent trading claim, directors may rely on section 588H(2) of the Corporations Act to seek to establish that they had reasonable grounds to expect (and did expect) that the company was solvent and would remain solvent, even if it incurred further debts.
In order to enliven such a defence, directors can point to the availability of funding from (among other places) related parties or themselves. In Trinick (as liquidators of Forgione Family Group Pty Ltd) (in liq) v Forgione & Ors (2015) 106 ACSR 600 (the Trinick Case) and in International Cat Manufacturing Pty Ltd (ACN 099 908 942) (in liq) & Ors v Roddicks & Ors (2013) 97 ACSR 200 (the International Cat Case), the Courts were required to determine whether the evidence as to the related parties / directors’ willingness and ability to provide funding to each of the companies was such that each of the companies would be able to pay all of their debts as and when due.
In the Trinick Case, Peter Forgione, a director of Forgione Family Group Pty Ltd (in liq) (Forgione) pointed to the availability of funding from his father (Frank Forgione), whom was also a director. Having considered the evidence, the Court rejected the assertion that Frank Forgione was ready, willing and able to provide funding to Forgione on the basis that (among other things) he had many opportunities to demonstrate his willingness to advance money to the company but did not do so, even upon receiving ATO penalty notices and notices of defaults issued by the bank.2
Importantly, the Court said:3
Frank Forgione’s evidence proclaiming his intention and continuing willingness to support the company financially so as to permit it to meet its debts as and when they fell due, does not survive scrutiny when assessed by reference to what he actually did, when given the opportunity to give effect to this professed intention and willingness. In short, Frank Forgione failed to act consistently with his professed state of mind. Accordingly, I find that Frank Forgione did not have the intention nor the willingness to which he deposed.
In the International Cat Case, a de facto director, Mr Roddick, of International Cat Manufacturing (ICM), was pursued by the liquidators for insolvent trading. On appeal, the issue was whether the arrangements between Mr Roddick and ICM was sufficient to ensure a course of finance such that ICM was able to pay its current and future debts as and when they fell due. The evidence of Mr Roddick’s willingness to provide funding to ICM included the following things done by Mr Roddick:
The Court ultimately concluded that Mr Roddick had committed himself to financing ICM and on his own evidence, Mr Roddick was a willing and committed financier.4
Importantly, the Court noted that although the loans to ICM from Mr Roddick were technically repayable on demand, the commercial reality was that Mr Roddick had no intention of making a demand such that the loans gave rise to an obligation which ICM was likely to meet at a later stage.5
While the evidence as to the parties’ willingness to provide funding to each of the companies is vastly different in the above two case, the most important consideration was the degree of commitment the parties had to continuing the financial support.6 Importantly, a parties’ evidence of their willingness to provide funding will be assessed as against their actual conduct. Accordingly, evidence of a mere intention and willingness to provide funding to a company in circumstances where debts have already fallen due, may result in the directors being unable to satisfy the Court that they had reasonable grounds to expect that the company was solvent.