QUESTIONS FROM LECTURE 9

PROCEEDS OF INSOLVENT TRADING CLAIM Section 588G deals with the duty of a director to prevent insolvent trading by the company. Section 588M provides for recovery of compensation for a loss resulting from insolvent trading. Such proceedings are usually brought by the liquidator and the proceeds of any proceedings are available for the benefit of all unsecured creditors - Section 588M(2) and Section 588Y.588G588M588Y Sections 588R, 588S, 588T and 588U deal with proceedings brought, not by the liquidator, but by a creditor. The creditor needs the consent of the liquidator or the leave of the court.588R588S588T588U The question was: –If a creditor brings proceedings and wins, does the creditor keep the damages or does that money go to all of the unsecured creditors?

PROCEEDS OF INSOLVENT TRADING CLAIM cont.. When a liquidator brings recovery proceedings, he recovers from the director “as a debt due to the company an amount equal to the amount of the loss or damage” - Section 588M(2). However, when a creditor brings proceedings he recovers from the director “as a debt due to the creditor an amount equal to the amount of the loss or damage” - Section 588M(3). Therefore if a creditor brings proceedings pursuant to s.588R (with liquidator’s consent) or Section 588T (without liquidator’s consent), the creditor is suing to recover a debt due to itself, rather than to the company i.e. the creditor keeps all of the proceeds of the proceedings.

DEBTS DUE TO SHAREHOLDERS - SECTION 563A Section 563A provides:563A “Payment of a debt owed by a company to a person in the person’s capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.” The first question: –What if a shareholder lent money to the company - would repayment of this loan be a debt which had to rank after debts owed to non-members? The second question: –What if a trade creditor happened to be a shareholder of a company? Would that trade debt rank below non-member debts?

DEBTS DUE TO SHAREHOLDERS - SECTION 563A cont…. Both questions are answered in the annotations to Section 563A in the 2009 Corporations Legislation book. The fact that a loan happens to be given by a person who is also a member, does not by that fact alone give rise to any indebtedness in that person’s capacity as a member - Re NIAA Corp Ltd (In Liquidation) (1993) 33 NSWLR 344 per Santow J. In Webb Distributors (Aust) Pty Limited v Victoria (1993) 179 CLR 15 the High Court held that Section 563A “will not prevent claims by members for damages flowing from a breach of a contract separate from the contract to subscribe for shares”.Webb Distributors (Aust) Pty Limited v Victoria Thus a debt due to a lender or creditor who happens to be a shareholder ranks alongside debts owed to “third party” unsecured creditors. It does not move down the queue and s 563A does not apply. The recently released Discussion Paper, which proposes to reverse Sons of Gwalia, does not propose to subordinate such debts.