Plead Properly! – A Case Analysis of Skyworkers Pty limited (in Liquidation) v Murace

The Federal Court decision of Copeland in his capacity as liquidator of Skyworkers Pty limited (in Liquidation) (Skyworkers) v Murace [2023] FCA 14 stresses the importance of liquidators adequately particularising claims in a Statement of Claim (SOC). In particular, the liquidator in this case was unable to identify the specific dates that the debts were incurred and how these debts arose. This made particularising the debts in the SOC difficult and the Court therefore needed to consider whether the particulars were inadequate and whether the SOC should be dismissed or struck out.

Background

Paul Murace was the sole director of Skyworkers. The liquidators filed a claim for insolvent trading against Mr Murace. In this claim, the liquidators pleaded:

1. Skyworkers was presumed to be insolvent because it failed to keep financial records; and alternatively

 

2. Skyworkers was actually insolvent because it could not pay its debts as and when they became due and payable.

Mr Murace filed an application for summary dismissal on the basis that:

1. The SOC did not plead the dates on which the debts were allegedly incurred or how they were allegedly incurred; and

 

2. The allegation that Skyworkers was presumed insolvent or actually insolvent was not adequately particularised.

Legislation

There were two key pieces of legislation that were relied on in this decision:

1. Section 588E(4) of the Corporations Act 2001(Cth) (Act) which presumes that a company is insolvent if the company has failed to keep financial records.; and

 

2. Section 95A of the Act which conveys that 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.

Arguments

Copeland in his capacity as liquidator of Skyworkers

The liquidator argued that the pleading should not be struck out because evidence had not yet closed. Additionally, the SOC represented all information available to the liquidator at the time of pleading.

Mr Murace

Mr Murace submitted that the liquidator failed to properly particularise the dates when the debts were incurred in the SOC and he was therefore prejudiced by the liquidators failure to do so. ​Without the dates and information surrounding how the debts incurred, Mr Murace was unable to rely on defences including:​

1. Defences about reasonable grounds, illness or reasonable steps as provided by section 588H of the Act; and

 

2. Safe harbour defences as provided by section 588GA of the Act.

 

Decision

Presumed Insolvency Claim

Mr Murace argued that section 588E(4) of the Act is not violated simply by the failure to maintain financial records and this failure needed to result in one of the 5 consequences. Skyworkers may have failed to keep financial records which:​

 

1. Correctly recorded and explained its transactions​;

 

2. Correctly recorded and explained its financial position​;

 

3. Correctly recorded and explained its financial performance​;

 

4. Would result in correct and fair financial statements​; and

 

5. Would enable the financial statements to be audited​.

The SOC failed to identify one of these possibilities and was held to be unsatisfactory.

 

Actual Insolvency Claim

Pursuant to section 95A of the Act, Skyworkers was unable to pay its debts as and when they became due and payable. The Court ruled that unlike a claim of presumed insolvency, actual insolvency does not require the same level of particularisation. Accordingly, Skyworkers was found to be insolvent.

Conclusion

Ultimately, the Court did not award summary judgment, however, an order was made for the SOC to be struck out in its entirety.

Takeaway

If a liquidator is going to bring proceedings against a company for insolvent trading, they need to be aware of the issues surrounding particularisation, especially in identifying the specific dates of the debts and how the debts arose.

If your company enters liquidation, or you are looking to pursue a company for any insolvent trading claims, you should seek legal advice on the drafting of pleadings and the overall prospects to minimise these risks.