Hall & Wilcox successfully defend de facto director claim

Before the Swan Group was placed into liquidation on 27 June 2013, it was the fifth largest cleaning contract business in Australia. It held significant contracts with major corporate groups, shopping centres, universities, airports and other public facilities.

In the proceedings, the Group’s liquidator, Anthony Elkerton, claimed that the Group traded whilst insolvent from 1 November 2012 to 22 May 2013. The liquidator sought to recover the debts incurred during this period – totalling approximately $11 million – from Bob Swan, the sole appointed director, and Mr Swan’s then wife, Judy Swan, on the basis of an allegation that she was a “de facto” director of each of the companies in the Group.

A de facto director is someone who acts in the position of a director despite never being formally appointed. If someone is found to be a de facto director then they can be held liable for insolvent trading under the Corporations Act 2001 (Cth) as if they were a duly appointed director.

Ms Swan, in addition to being married to the Group’s sole director, was at times the Group’s general counsel, human resources manager and chief executive officer. She had also lent significant sums of money to the Group and considered herself to be its secured creditor (it was ultimately found that the security was invalid due to the uncertain language of the charge documentation entered into in 2003).

The proceedings were heard by Justice Black from 13 September to 7 October 2016 in the Supreme Court of New South Wales. In defence of the claim, evidence was led from a number of people including previous employees of the Group, external accountants and Mr and Ms Swan. There was also a substantial amount of documentary evidence led by the liquidator extending over the period from 1999 to 2013. His Honour found that whilst the evidence showed that Ms Swan had at times played a significant role in the Group and had aspired to exert an even greater influence, these aspirations were not accepted by Mr Swan or others in the Group and were ultimately not achieved.

His Honour recognised that part of Ms Swan’s interest in the Group could be attributed to her being married to its sole director. However, his Honour stated that he would not treat a family member differently from any other person who becomes involved in a company’s management in determining whether they should properly be characterised as a de facto director. This was a departure from the observations of Justice Madgwick in Deputy Commission of Taxation v Austin [1998] FCA 1034 to the effect that care should be exercised before characterising a member of a director’s family, who provides assistance in a period of crisis, as a de facto director.

His Honour also recognised that another part of Ms Swan’s interest in the Group could be attributed to the fact that she considered herself to be one of its secured creditors. His Honour accepted the proposition that a secured creditor may make demands of a debtor company without the company’s compliance with those demands establishing that the secured creditor had become a de facto director. However, his Honour went on to note that a secured creditor who acted on a company’s behalf in appropriately significant matters “may more readily be characterised as a de facto director than a secured creditor which set requirements which a company may have to meet as a condition of continuing financial support”.

In this case, the evidence did not support a finding that Ms Swan had acted as a “de facto” director of the Group. Mr Swan remained the sole signatory for all Group accounts and was identified by employees as holding a position superior to that of Ms Swan. Ms Swan received limited financial information and her appointment of advisors and dealings with the ATO was explicable by reference to her position as a secured creditor. Whilst Ms Swan attempted to challenge directions given by her husband, it was not established that she ever succeeded. His Honour held that Ms Swan, in fact, failed to exercise any real authority and had a more limited role within the Group than that to which she had at one point aspired, or on occasions had suggested that she held. Mr Swan continued to exercise authority as to significant matters within the Group throughout the relevant period.

The decision is significant as an example of an alleged de facto director having a multifaceted involvement with an insolvent company but never exerting the level of authority or control required to be found to be a “de facto” director.

It is also significant in clarifying an important legal point in relation to which there were divided authorities from appellate decisions of state courts: that a liquidator must, in proving loss or damage for the purposes of an insolvent trading claim, bring to account any anticipated or estimated return to creditors in the relevant insolvencies.

Hall & Wilcox represented Ms Swan in this matter.