Introduction
Justice Croft of the Supreme Court of Victoria removed a liquidator from the winding up of a company determining he failed to act honestly by settling unfair preference claims with the ATO and SRO without disclosing key information in Re Gemwood Projects Pty Ltd (in liq) [2025] VSC 819.
Background
From 1999, the Georgiou family operated a commercial cabinetry business under Gemwood Projects Pty Ltd (Company).
From 8 August 2016, the Company traded as Trustee of the Gemwood Projects Discretionary Trust. Mr Emilios Georgiou (Mr Georgiou) was the sole director of the Company, and was also a principal beneficiary of the Trust.
Mr Georgiou regularly provided third-party funding to extinguish the Company’s debts through his own company: Emilios Georgiou and E&C Georgiou Nominees Pty Ltd as Trustee for the Emilios Georgiou Trust.
By 2018, the Company owed the ATO and SRO over $600,000. Mr Georgiou did not assist financially as the Company already owed him approximately $3,600,000.
On 4 July 2019, Mr Georgiou appointed a voluntary liquidator (Liquidator) to the Company.
In July of 2019, the Liquidator investigated and considered that $432,731 paid to the ATO and $120,622 paid to the SRO could qualify as unfair preference claims, and soon thereafter initiated claims.
On 3 December 2020, the Liquidator executed a deed of settlement with the SRO for $72,000, provided that the Commissioner was entitled to lodge a proof of debt as an unsecured creditor.
In 2021, the Liquidator received two offers from the ATO.
Offer 1: the Liquidator will accept $350,000 in full and final satisfaction of the Commissioner’s liability under an s 588FF order, and the Liquidator will give written notice to Mr Georigou of this within 7 days of acceptance of the offer;
Offer 2: the Liquidator will accept $275,000 in full and final settlement of all claims against the Commissioner.
By July 2021, the Liquidator accepted Offer 2, after negotiating the settlement amount to $310,000.
Following this, the Liquidator brought proceedings against Mr Georgiou alleging that Mr Georgiou failed to comply with his duty to prevent insolvent trading under s 588G(2) of the Corporations Act 2009 (Cth) (Act).
Mr Georgiou brought a counterclaim, seeking an order that the Liquidator be removed from his position, that he not recover any of his remuneration or expenses incurred in respect of the proceeding, and a declaration that the Liquidator failed to comply with his obligations under the Civil Procedure Act 2010 (Vic) (CPA).
Mr Georgiou argued as the basis for making these orders that the Liquidator withheld information from the SRO and ATO in negotiating settlements.
Court Findings
Was Mr Georgiou liable for insolvent trading?
The Supreme Court considered the claim against Mr Georgiou of insolvent trading and began its assessment of whether the Company was insolvent with reference to s 95A of the Act:
(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable;
(2) A person who is not solvent is insolvent.
The Court indicated that due to the circularity of the Act’s definition of insolvency, it was required to consider established precedents.
Justice Croft referred to the cases of Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation, and Australian Securities and Investments Commission v Plymin (No 1) and determined the Court’s role was to consider the legally enforceable debts owed by the Company, having regard to its commercial realities, and to assess whether the resources the Company had available to it enabled the Company to discharge its liabilities as they fell due.
While the Company’s failure to pay all its debts on time was a factor in assessing its insolvency status, it was not determinative.
Justice Croft emphasized that a Court’s assessment of insolvency is one which considers the commercial realities the Company faces. As late or disputed payments were assessed by the Court as an industry standard, the Company’s decision to delay payments or negotiate debts did not establish insolvency.
The Court determined the Company had access to third-party funding from Mr Georgiou’s entity at all relevant times. The Company could utilize these funds to discharge its liabilities and was therefore solvent. Accordingly, Mr Georgiou was not found liable for insolvent trading.
Was the Liquidator
Justice Croft identified that as there were ‘serious allegations’ against the Liquidator, that evidence capable of causing a ‘real degree of persuasion’ had to be adduced by the accusing party.
The Court determined that it was required to apply the ‘Briginshaw standard’ of proof to assess the validity, or otherwise, of the Liquidator’s conduct.
This standard is derived from the High Court decision of Briginshaw v Briginshaw,[3] in which it was determined that although the civil standard of proof on the balance of probabilities applies, “the standard of proof required by a cautious and responsible tribunal will naturally vary in accordance with the seriousness or importance of the issue”.[4]
In reaching this conclusion, Justice Croft noted the authorities which caution against courts readily making orders against liquidators.
In cross-examination, the Liquidator conceded that the reason he accepted the lower value offer from the ATO was to ensure Mr Georgiou was not given notification of the claims against the ATO, as he could have raised questions as to whether the Company was actually insolvent.
In negotiating the SRO settlement, Mr Georgiou informed the SRO that the ATO had made a statutory demand against the Company for $381,298.84, despite knowing that, during that period, $433,000 had been paid by the Company to the ATO.
Although the Liquidator then specified that the Company was, at that time, indebted to the ATO for a sum of $41,604.53, the Liquidator never specifically informed the SRO that the Company had paid down a significant portion of its debts owing to the ATO.
It was further conceded that in negotiating these settlements, the Liquidator failed to disclose that the Company had historically received third party funding from Mr Georgiou.
The Court determined the Liquidator breached his obligations to:
further the administration of justice (CPA s 16);
to act honestly (CPA s 17);
to not make a claim which does not have a proper basis (CPA s 18);
to not mislead or deceive (CPA s 21) and
to ensure that costs are reasonable and proportionate (CPA s 24).
Justice Croft confirmed that the circumstances of the case warranted the Liquidator’s removal, and that such removal would be in the best interest of the Company. He further clarified there is no distinction between the duties owed by a court-appointed liquidator and a voluntary liquidator.
The Court utilized its discretionary powers pursuant to s 90-15 of the Insolvency Practice Scheule (Corporations) of the Act to order the Liquidator’s removal, and disallowed remuneration and expenses incurred in the proceeding. The Liquidator was ordered to return the settlement sums of $310,000 and $72,000 to the ATO and SRO respectively.
Key Takeaways
A Court’s assessment in determining solvency status will place emphasis on a company’s commercial reality including financial support it may be able to secure from a director.
Liquidators must ensure that when reaching negotiated settlements that they are doing so on without withholding material facts known to them that may affect a negotiated settlement sum.
If you have any questions in respect of this case or the principles it considers please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Chris Downes
Law Clerk
E: cdownes@sladen.com.au
