Better safe than sorry – seek advice when in financial difficulty

Articles, Restructuring + Insolvency

The recent decision of the Federal Court of Australia in Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq) [2015] FCA 319 is a timely reminder that entering into repayment agreements with creditors is not sufficient to protect director’s from liability for insolvent trading. Further, where a director had notice that the company was insolvent at the time a debt was incurred, the director will be precluded from relying on the set-off pursuant to section 553C(2) of the Corporations Act 2001 (Cth) (‘the Act‘).

Mr Boné was the sole director of Petrolink Pty Ltd (Petrolink). An action was brought by the liquidator of Petrolink against Mr Boné in respect of debts incurred with the company was insolvent. Section 588G of the Act imposes a strict duty on directors to prevent the company from incurring debts when there are reasonable grounds for suspecting that the company is insolvent.

The Court considered whether there were reasonable grounds for suspecting that the company was insolvent in circumstances where there were payment arrangements with the Australian Tax Office in respect of tax debts owed by the company. Mr Boné contended that those arrangements meant that the tax debt was not ‘due and payable’ and so could not be considered in proving the company’s insolvency at the time the debts were incurred.

The Court referred to section 255-15 of  Schedule 1 to the Tax Administration Act 1953 (Cth) which provides that an arrangement to pay a tax-related liability by installments does not vary the time at which the amount is due and payable. Further,the Plaintiffs relied on Hall v Poolman [2007] NSWSC 1330 in support of their submission that a dispute as to a tax debt did not mean that it was not payable.

On the basis of these submissions, the Court accepted that:

‘none of the numerous payment arrangements between Petrolink and the ATO caused a tax debt which was due and payable to cease to be due and payable’.

As a result, given that Mr Boné had allowed the company to incur debts whilst insolvent, he was not able to set-off  debts owed to him by the insolvent company as against his liability for insolvent trading. Section 553C(2) of the Act provides that a person is not entitled to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.

Directors should head the Court’s warning that allowing a company to incur debts while insolvent will preclude the director from claiming a set-off.

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