In its recent decision in the ongoing Solar Shop litigation,[1] the Full Federal Court established two key principles which will have significant ongoing implications for the conduct of unfair preference claims:
The liquidators of Solar Shop Australia Pty Limited (the Company) commenced unfair preference claims against the Respondents. A preliminary trial was held on a separate question common to the claims, being the question of when the Company became insolvent within the meaning of s 95A of the Corporations Act 2001 (Cth) (the Act). The primary judge held that the Company became insolvent by 31 July 2011. The liquidators appealed, seeking a finding of insolvency by 31 January 2011 or in the alternative, 30 April or 22 May 2011.
Part of the Respondents’ cross-appeal relied upon the liquidators’ failure to make discovery of approximately 1,000 documents which ought to have been discovered at first instance.
In seeking to argue that they had conducted “reasonable searches” as required by the relevant court rules despite their limited pre-discovery review of the available electronic documents, the liquidators contended:
The Court rejected the liquidators’ arguments, finding that many of the liquidators’ contentions about the electronic records were mere conjecture, as there was no evidence of any attempt to interrogate the cloud or otherwise ascertain the nature and extent of available relevant electronic material and the ease and cost of accessing it.[2] Consequently, the liquidators failed to prove that they undertook a reasonable search of the documents in their control, including by their failure to inform the Court or the Respondents of their intention not to search the cloud server or otherwise explain why they did not have access to a forensic image of the Company’s file servers.[3]
The Court then had to assess the consequences of the liquidators’ breaches of their discovery obligations in light of the facts that those breaches had been revealed only during the appellate process and the liquidators, as the parties in breach, were seeking to set aside the orders made at first instance.
Given that the liquidators had failed to establish the absence of a realistic possibility of the existence of documents which might be deployed by the innocent parties to meet the defaulting party’s claims, the Court held that the liquidators’ appeal should be dismissed, as any consideration of the appeal would be built on a “hypothetical and potentially false basis”.[4]
Accordingly, the liquidators’ ongoing failure to make proper discovery meant that the primary judge’s determination of the separate question should be set aside and the question remitted back to the court below, but expressly on the basis that it would not be open for the court to find that the Company was insolvent on a date before 31 July 2011. The basis for this reservation was that the Respondents should not have to incur the expense of re-litigating issues and the liquidators should not be given a second chance to establish an earlier insolvency date.[5]
Between 14 January and 30 June 2011, the Company entered into several payment arrangements with the ATO. One of the grounds relied upon in the Respondents’ cross appeals was that the payment arrangements meant that the Company’s debt to the ATO was not due and payable and therefore should not have been considered by the primary judge as relevant to any finding of insolvency.
The Company’s liabilities for GST, PAYG and FBT were recorded in an integrated running balance account maintained by the ATO. The primary judge noted that the Company’s inability to pay these liabilities in full had resulted in numerous “legal warnings” and the ATO’s agreement to an arrangement for payment by instalments.
At both first instance and on appeal, the liquidators established that the payment arrangements were made under s 255-15 of the Taxation Administration Act 1953 (Cth) and that such arrangements did not vary the time at which the Company’s liabilities to the Commissioner of Taxation were due and payable.
In coming to this conclusion, the Full Federal Court made the following findings:
[1] Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5.
[2] Clifton [2020] FCAFC 5 at [147]-[150].
[3] Clifton [2020] FCAFC 5 at [155]-[158], [166].
[4] Clifton [2020] FCAFC 5 at [203] and [205].
[5] Clifton [2020] FCAFC 5 at [206].
[6] Clifton [2020] FCAFC 5 at [498]-[503].
[7] Clifton [2020] FCAFC 5 at [505]-[506].
[8] Clifton [2020] FCAFC 5 at [507].
[9] Clifton [2020] FCAFC 5 at [514]-[515].
[10] Clifton [2020] FCAFC 5 at [508] and [514].
[11] Clifton [2020] FCAFC 5 at [519]-[523] and [534], citing Palmer J in Hall v Poolman [2007] NSWSC 1330.
[12] Clifton [2020] FCAFC 5 at [531].
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