Queensland Court hits director with $1.1 million insolvent trading judgment despite COVID safe harbour

The Supreme Court of Queensland has ordered the sole director of a strawberry farming business to personally pay more than $1.1 million in damages for insolvent trading, rejecting arguments that the temporary COVID-19 safe harbour shielded debts incurred to a labour hire supplier during the pandemic.

The claim was brought by Star Recruitment Service Pty Ltd, a licensed labour hire provider, against Leonard Brian Smith, the sole director of GG Group (QLD) Pty Ltd, which operated a strawberry farm near the Glass House Mountains. Between August 2020 and November 2021, the company incurred more than $1.6 million in unpaid invoices for labour supplied under a written services agreement, before being placed into liquidation on December 1, 2021.

Star alleged that the company traded while insolvent in breach of section 588G of the Corporations Act and sought compensation from Smith under section 588M. Smith disputed both insolvency and causation, and relied heavily on section 588GAAA, the temporary COVID-19 safe harbour provision, arguing it insulated him from liability because the debts were incurred in the ordinary course of business during the regulated pandemic period.

Justice Muir rejected that construction of the safe harbour. The Court held that section 588GAAA only applies where no administrator, restructuring practitioner, or liquidator is appointed during the regulated period, and does not extend protection where a liquidator is appointed after the expiry of that period in respect of earlier incurred debts. On that basis, the provision did not bar Star’s insolvent trading claim.

On insolvency, the Court found that GG Group was insolvent from at least January 1, 2021, pointing to persistent liquidity ratios well below one, a heavy reliance on unsecured and related-party funding, substantial trade creditors well outside trading terms, and an inability to raise further finance. While not all traditional insolvency indicators were present, Justice Muir found that insolvency must be assessed holistically and the company was insolvent on a cash flow basis.

Smith’s evidence that related entities could have supported the business was rejected, with the Court finding that supplier credit had been exhausted and that post-liquidation settlements with major creditors did not demonstrate an ability to meet debts as they fell due at the relevant time. The Court also applied the Briginshaw standard, noting that insolvent trading findings carry serious civil and potential criminal consequences.

The Court further dismissed Smith’s attempt to reduce liability by blaming rejected strawberry consignments on allegedly defective labour supplied by Star. Justice Muir found no causal link between the claimed “knockouts” and the company’s insolvency, noting that such losses were a common farming risk, that the company retained ultimate control over quality decisions, and that management had directed staff to conceal substandard fruit.

Judgment was entered for Star in the amount of $1,108,441.71, plus pre-judgment interest of $321,422.28, with Smith ordered to pay Star’s costs on the standard basis, reinforcing the continued exposure of directors to insolvent trading claims despite the existence of the safe harbour provisions.

Read the decision here.

Jason Wang of Hemmant's List (instructed by Roy Kim and Seunghyun Jin of Baystone Legal) acted for Star Recruitment Service, while Graham Dietz of George Street Chambers (instructed by Sciacca & Associates) acted for the defendant.