In Cribb v Kingsbury  FCA 551, a decision of the Federal Court of Australia, the Court delivered a judgment considering amongst other things the extent to which a director can rely on wrongful information given to him or her as a defence to liquidator claims.
The case concerned a bakery established in the Kimberley region. The defendant was a director whose role was to provide capital for the business. His fellow director ran the business.
The company operated on the premises owned by a company related to the defendant and the uncontroversial evidence was that the defendant both provided funding for the company from time to time and relied on information given to him by the other director concerning the financial affairs of the company and particularly its lodgment with the ATO of required returns and payment of taxes. That information turned out to be false and the company had substantial arrears with the ATO.
The company was ultimately placed into liquidation and the liquidator sued to recover from the defendant monies paid to his related company and losses suffered while the company was insolvent including a significant outstanding recover money paid to the defendant’s related company, losses caused by alleged breaches of duty and losses caused by insolvent trading.
The Court dismissed the liquidator’s claim for monies paid to the director’s related company. The Court had no difficulty in holding that the payments were made for a good reason and that a commercial benefit was obtained from the payments, which included payment for the rent of the premises. The Court had no difficulty in disposing of the liquidator’s claim and seemed surprised that it had been brought.
The Court was equally dismissive of the liquidator’s claim for monies recoverable as a consequence of alleged insolvent trading.
In reaching its decision, the Court found that the defendant was provided with monthly management accounts and information provided which wrongfully claimed the companies tax liabilities would be or had been dealt with.
In 2012 the ATO issued a garnishee notice which came to the attention of the director but again he was provided with false information from his fellow director concerning both those arrears and ongoing tax obligations. Notably the director contributed monies to enable the company to pay the amount of the garnisheed debt.
In resisting the insolvent trading claim the defendant pointed to the fact that he had continued to advance monies to the company and or deferred payment of monies that were owed to his related company. The director claimed that he had taken these steps in reliance on the information provided to him by his fellow director.
The liquidator in advancing his claim for insolvent trading and breach of duty by the director alleged that he did not perform his duties with reasonable care and diligence in that he failed to:
- make independent enquiries of the companies accountants;
- failed to inform himself of the outstanding tax obligations and lodgments;
- failed to notice that the company was making regular lump sum payments to the ATO; and
- while he was provided with some information concerning the companies monies, he did not take steps to independently satisfy himself concerning that information.
The Liquidator maintained that as the director knew of his fellow directors “chequered history” (he had previously operated a bakery business which became insolvent) he should have adopted a “heightened” state of awareness in relation to the information given to him concerning the company.
The Court had no difficulty in rejecting the liquidator’s claim. The Court found that the director was in regular contact with his fellow director and was reasonably satisfied with the information and responses given to him. The Court noted that when the director became aware of the true state of affairs he stopped funding the working capital loans of the company and the Court believed that had he known the true position, he would have ceased that funding earlier.
In reliance on Asic v Rich (2009) NSW SC 1229 the Court confirmed that the minimum standard of diligence required from a director is that he or she is kept informed about the companies activities and maintains familiarity with the financial statements of the company including a review of the company’s financial statements. The Court noted here that the director did not simply accept at face value everything he was told by his fellow director and noted that the extent of the deception was so substantial it would be unlikely to have been anticipated or predicated by most business people. Essentially, there were not enough red flags to put the director on notice.
The case must be understood against the background in which the director defending his position had been funding the financial position of the company for some time, but nonetheless remains a useful example of circumstances in which reliance on false information can be a defence to claims.
The case is also interesting because in it expert evidence was led by both the defence and the liquidator. The Court preferred the expert evidence given for the defendant for a number of reasons and did note that one of those reasons was because the expert evidence of the defendant was not given by a party.
The Court showed a clear preference for independent evidence to be given by truly independent parties and the case serves as a further example of the risks liquidators run in purporting to be their own expert.