The case of Dean v My Solicitors Pty Ltd (in liquidation)[1], saw Justice Moore give leave to Mr Dean, as creditor of My Solicitors Pty Ltd (My Solicitors), to sue its director, Mr Klievens, for losses incurred from insolvent trading, despite not having the liquidator’s written consent.
Background
Mr Klievens was the sole director, secretary and shareholder of My Solicitors, while Mr Dean was the company’s sole creditor.
Mr Dean obtained two judgements in lower courts against My Solicitors amounting to $136,589.44.
My Solicitors went into liquidation. The liquidator had no funds to pursue actions.
Under section 588R of the Corporations Act 2001 (Cth) (Act), a creditor may begin proceedings under section 588M for insolvent trading with the written permission of the company’s liquidator. However, in this case, no such consent had been provided. Sections 588S and 588T of the Act operate in conjunction to allow a creditor to sue for compensation without the liquidator’s consent provided that sufficient notice has been provided to the liquidator.
Under section 588S, sufficient notice is only considered to have been given if the creditor gives written notice to the liquidator after the end of 6 months after a company begins to be wound up.
That written notice must:
(a) state that the creditor intends to begin proceedings under section 588M (for insolvent trading) relating to:
(i) the incurring by the company of a specified debt that is owed to the creditor; or,
(ii) a specified disposition by the company of property, because of which (and the company’s insolvency) the creditor has suffered loss or damage.
and:
(b) ask the liquidator to give to the creditor, within 3 months after receiving the notice:
(i) a written consent to the creditor beginning the proceedings; or
(ii) a written statement of the reasons why the liquidator thinks that proceedings under section 588M should not be begun.
Under section 588T(2), if notice has been provided in accordance with section 588S, the creditor may begin proceedings under section 588M where:
(a) at the end of 3 months after the liquidator receives the notice, he or she has not consented to the creditor beginning such proceedings; and,
(b) on an application made after those 3 months, the court has given leave for the proceedings to begin.
In cases where the liquidator disagrees with the proceedings, then under section 588T(3), where:
(a) during the 3 months after the liquidator receives the notice, the liquidator gives the creditor a written statement of the reasons why they think that such proceedings should not commence; and,
(b) the creditor applies for leave from the Court.
then:
(c) the creditor must file the statement with the court when so applying; and
(d) in determining the application, the court is to have regard to the reasons set out in the statement.
Mr Dean sought leave from the liquidator to commence against Mr Klievens. No consent was given.
Mr Dean then sought leave from the Court under the notice provisions in subsections 588S and 588T to bring insolvent trading proceedings directly against Mr Klievens as the director of My Solicitors in respect of the losses Mr Dean had suffered as creditor.
Key Issue
The key issue was whether Mr Dean would be granted leave to bring proceedings under section 588M against Mr Klievens.
Court Findings
Justice Moore granted leave to Mr Dean to commence proceedings pursuant to section 588T(2) of the Act on the basis that:
Mr Dean appeared to be the sole creditor and his intention to commence an action pursuant to s 588M would not prejudice the position of any other creditor;
The liquidator did not oppose a grant of leave; and,
No proper argument against the grant of leave could be identified.
Justice Moore also upheld the Registrar’s dismissal of Mr Dean’s separate claim for an interlocutory application seeking an order under section 509(2) of the Act that My Solicitors deregistration be delayed but ordered that the liquidators had to provide in effect 4 months notice of an intention to lodge a deregistration notice of the company.
Key Takeaways
In certain circumstances, liquidators may not take active steps to recover compensation for creditors. This may be due to, among other things, the liquidator’s assessment of risk vs. reward, or a lack sufficient time and/or funding.
Under section 588M of the Corporations Act (2001), creditors can take direct action against directors to recover insolvent trading losses suffered of insolvent companies six months after the commencement of a liquidation.
The process for doing so is to first try and obtain the liquidator’s consent and if they are not forthcoming, then take the steps required under subsections 588S and 588T of the Act.Whether a creditor would choose to do so would be decided after a consideration of:
The assets of the director;
Whether any insurance was available for the director;
Prospects of recovery of the debt sought to be recovered; and,
Whether the safe harbour regimes were applicable to prevent an insolvent trading claim being made.
For more information please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Ben Ponte
Law Clerk
E: bponte@sladen.com.au
[1] [2025] FCA 159
