By Chloe Howard of Matthews Folbigg Lawyers, a lawyer in our Insolvency, Restructuring and Debt Recovery Group
A company is presumed to be insolvent if it fails to keep proper financial records (section 588E(4) of the Corporations Act 2001 (Cth)).
But what if you have the records, but providing them might send you to gaol?
This issue was recently discussed in the matter of Substance Technologies Pty Ltd [2019] NSWSC 612.
In this matter, the director refused to respond to a liquidator’s repeated requests for the company’s financial records because he said the records might contain incriminating material. He couldn’t be certain but “would suspect there could well be.” (at [42])
Justice Rees drew attention to the similarities between Sections 77(1) of the Bankruptcy Act and Section 530A of the Corporations Act. Both sections require production of records to insolvency practitioners. Her Honour noted that in Griffin v Pantzer (as trustee of the bankrupt estate of Griffin) [2004] FCAFC 113 the Federal Court had held that a claim for privilege against self-incrimination did not override the obligation of a bankrupt to provide records to a trustee in bankruptcy.
The liquidator in Substance Technologies argued that the failure to produce the records meant that the Court should infer that the records did not exist (and therefore the presumption of insolvency applied). Justice Rees held that an adverse inference should not be drawn simply because a party had invoked the privilege against self-incrimination, (following Dolan v Australian and Overseas Telecommunications Corporation (1993) 42 FCR 206). The Court also held that an inference could only be drawn from evidence available to the Court (rather than from the absence of evidence or the fact that the claim for privilege had been made).
Justice Rees was reluctant to comprehensively examine whether privilege against self-incrimination was available in the context of sections 286 or 588. However her Honour was prepared to assume the privilege was available and invoked. On the other hand her Honour held that the mere fact that the privilege was invoked did not mean that the Court should assume that the records existed and had been maintained pursuant to section 286 of the Corporations Act. Ultimately, in this case Justice Rees held that the presumption of insolvency arose as the evidence before the Court showed that the company had failed to lodge tax returns for a number of years, and that the director had not responded to requests from the liquidator for records (prior to invoking the claim for privilege), and because the directors’ claims that they had complied with s286 could not be corroborated.
The decision can be read in full here.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Chloe Howard at ChloeH@matthewsfolbigg.com.au or a Principal of the Matthews Folbigg Lawyers’ Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
