To appear or not to appear – the costly exercise of default in insolvency proceedings

By Alicia Hill, Principal and Sian Harding, Law Clerk

The recent decision in Owens as Liquidator of Davey SG Pty Ltd (in liq) v Davey involved an application by the liquidator seeking an order for payment of compensation by the sole director in accordance with s 588G and s 588M regarding debts incurred during insolvency. The Court found Mr Davey in default after he did not appear at the hearing nor did he comply with pre-trial programming orders. After considering the liquidator’s submissions, he made a default judgement in favour of the plaintiffs, ordering Mr Davey to pay $931,024 plus interest of $70,718.32.

This case involves a relatively straightforward application of the Corporations Act 2001 (Cth) (Act) in the context of a director’s liability for debts incurred during insolvency. However, it serves as a reminder of the importance of following court processes and adequately considering any offers of compromise made by a party.

Background

Mr Davey was the sole director, shareholder and secretary of Davey SG Pty Ltd (in liq) (the Company). The Company was incorporated on 28 June 2013 and conducted a computer repair business.

On 24 March 2015 the Company was placed into voluntary administration, and on 11 May 2015 a Deed of Company Arrangement (DOCA) was executed, with sole control of the company reverting to Mr Davey. This DOCA was fully effectuated and terminated on 18 May 2017.

ASIC had disqualified Mr Davey from managing any corporation for a period of two and a half years commencing on 21 January 2017.

On 13 October 2017 the company was wound up in insolvency and a liquidator was appointed. Mr Owens was appointed as the present liquidator following the resignation of the past liquidator.

The liquidator issued an insolvent trading demand to Mr Davey on 30 November 2018 following investigations into the Company. On 18 July 2019 the present proceedings were brought against Mr Davey. The liquidator outlines that the relevant period of insolvency is 11 May 2015 as the date of execution of the DOCA to 30 October 2017 which was the date the company was wound up (the Insolvency Period).

The liquidator identified four debts as having been incurred in the Insolvency Period cumulatively amounting to $931,024.01 and it was accepted by the Court that they were all incurred within the insolvency period.

Decision to make a default judgement

Rule 23 of the Federal Court Rules 2011 (Cth) (Rules) provides an avenue by which the Court may make an order against the respondent in default.

Stewart J made reference to the decision of Chamberlain Group, Inc v Giant Alarm System Co, Ltd (No 2) [2019] FCA 1606 (Chamberlain Group) which noted the discretionary nature of the power to give judgement against a defaulting party and the importance of exercising this discretion cautiously.

He nevertheless held that both r 23(2)(b) and (c) applied to the circumstances of the case. Mr Davey indicated by email from his solicitors that he did not propose to appear at the hearing. As that email foreshadowed, he did not. Mr Davey’s name was called outside court and he was given notice of a remote link to the hearing and did not appear via that remote link. Additionally, he failed to comply with pre-trial programming orders. Therefore, he was held to be in default per r 5.22 of the Rules.

Decision regarding order for payment of compensation by Mr Davey

Chamberlain Group noted that “where the defaulting party is a respondent to a pleaded claim, the giving of judgement for final relief … will deliver complete success to the applicant without investigation of the merits of the pleaded claim”. However, the plaintiff’s amended concise statement did not plead each material fact underlying their cause of action. Thus, in the context of default of Mr Davey, Stewart J heard evidence from the plaintiff liquidator regarding the material facts underlying their cause of action. He acknowledged Mr Davey’s ‘concise statement’ and ‘brief affidavit as outlining his defence to the claim.

The liquidator contended that Mr Davey’s conduct the circumstances of the matter satisfied all the requisite elements of s 588G and s 588M. Mr Davey sought to defend the claim by reason that he was disqualified from acting as a director of the Company by ASIC from 21 January 2017 and that the company was solvent as it enjoyed financial support from a third party, TRM Australia Pty Ltd. (TRM)

His Honour found in favour of the liquidator’s claim with Mr Davey in default and ordered there be judgement in the liquidator’s favour for $931,024 plus interest of $70,718.32.

He found that that Mr Davey was a director at the time the time the debts were incurred, despite his disqualification by ASIC. Mr Davey remained acting in the position of a director and therefore was a director for the purpose of s 9 of the Act. The expert insolvency report tendered by the liquidator concluded that the Company was insolvent for the insolvent period and that TRM was in fact a net borrower from the Company. Finally, His Honour inferred that Mr Davey was aware of the Company’s insolvency from his conduct and the surrounding circumstances. Due to Mr Davey’s default, he was not able to adequately present a defence, and His Honour inferred from Mr Davey’s failure to appear that he is not able to give honest evidence in support of his defence.

Stewart J was therefore satisfied of the liquidator’s claim and ordered there be judgement in their favour for $931,024 plus interest of $70,718.32.

On the consideration of costs, Steward J noted the offer of compromise made by the liquidator stating that they were willing to accept an amount of $350,00 in respect of the claim inclusive of costs. Due to this reasonable offer of compromise that was not accepted by Mr Davey, His Honour awarded costs on an indemnity basis from the third business day after the offer was served.

Conclusion

Despite the straightforward nature of the facts of the case for the purpose of s 588G and 588M, this case is notable for Stewart J’s willingness to enter a default judgement against the defendant. It is therefore indicative of the importance of appearing at the relevant hearing and complying with any other orders. Due to the non-acceptance of the highly reasonable offer and default of appearance, the subsequent judgement made against Mr Davey proved for him to be extremely costly.

If you have any questions about this article or insolvency more generally, please contact Alicia Hill by email alicia.hill@mst.com.au, or by telephone on +61 3 8540 0200