NSW case confirms when a de facto director can be held liable for insolvent trading

Trinco (NSW) Pty Ltd was a management company working closely with Trinity Constructions (Aust) Pty Ltd. Trinco’s sole registered director was Robin Azizi, but the court found that her brother and the director of Trinity, Anthony Azizi, exercised ultimate control over Trinco’s operations. Trinco incurred substantial debts to subcontractors and suppliers while relying entirely on Trinity for funding and generating no independent revenue.

When Trinco entered liquidation, the liquidator pursued Anthony Azizi under sections 588G and 588M of the Corporations Act 2001 (Cth) for insolvent trading and alleged that he was a de facto director, despite never being formally appointed as a director with the Australian Securities and Investment Commission (ASIC). The court ultimately ordered Anthony Azizi to pay approximately A$10 million (approx. US$6.451 million) to Trinco.

De facto director 

Central to the decision was whether Anthony Azizi was also a de facto director of Trinco. The Court found that Anthony Azizi was a director not because of title or registration, but because of his conduct. This was based on the fact he was the ultimate decisionmaker for Trinco’s operations, including contractual dealings and creditor negotiations, he had negotiated directly with creditors, often without the involvement of the appointed director, and had directed Trinco to enter contracts supporting Trinity’s construction projects.

Establishing liability

Under the sections 588G and 588M of the act, which impose liability on directors, including de facto directors, for insolvent trading, the liquidator had to establish three elements.

Firstly, they had to show that Trinco was insolvent when the debts were incurred. Expert evidence showed persistent cash flow deficits, reliance on Trinity for funding and overdue accounts and this element was uncontested in the courts.

Secondly, they had to establish that there were reasonable grounds for suspecting insolvency. The court stressed that suspicion does not require certainty for this element to be established, and the inability to pay creditors on time and dependence on related-party funding in circumstances where insufficient funds were being advanced were clear warning signs.

Finally, the liquidator had to establish that Anthony Azizi failed to prevent Trinco from incurring those debts. The court noted that he had ultimate control over the company and could have stopped Trinco from entering new contracts, but instead allowed the company to continue trading, which exposed its creditors to further risk.

The court concluded that a reasonable person in this position would have been aware of suspected insolvency. Despite this, Trinco continued to incur obligations to subcontractors and suppliers, while relying entirely on Trinity for funding. This strategy effectively shifted financial risk onto unsuspecting creditors.

Security interests

To be liable under section 588M of the act, a debt must be wholly or partly unsecured, or does not have an asset pledged as collateral, when the loss was incurred. The court’s decision confirms that this assessment occurs when the section 588M claim is being resolved, and not when the debt was originally due.

As a result, if a creditor has surrendered its security under s 554E of the act as proof of a winding-up of a company, the debt is considered unsecured for the purposes of recovery against directors.

In this case, most creditors had surrendered their security interests, allowing their debts to qualify for the claim under section 588M of the act. However, one claim failed because its personal property securities register (PPSR) registration remained in place and the creditor had not elected to surrender or realise its security.

For practitioners and liquidators, this decision highlights several important factors to consider:

Identify de facto directors early

Do not rely solely on ASIC records to determine who the insolvent company’s directors are. Liquidators must investigate who ultimately makes management decisions. These individuals may be de facto directors and could be liable under s 588M of the act if the company has traded whilst insolvent.

Build a detailed evidentiary trail

Courts require precision. For each debt, confirm when it was incurred, that it falls within the relevant period, that it was wholly or partly unsecured at the time of loss and use proofs of debt, accounting records, and contemporaneous documentation.

Prove insolvency and suspicion objectively

Gather evidence of payment delays, reliance on related-party funding, and inability to meet obligations. Expert solvency reports should address the date of insolvency.

Check security status before filing

Under s 588M(1)(c) of the act, debts qualify only if security is surrendered during winding-up. Confirm PPSR status and obtain evidence of surrender or valuation under s 554E of the act.

Scrutinise group structures

Inter-company arrangements without formal agreements increase risk. Map funding flows and governance lines to show how liabilities were incurred and who controlled decisions.

Document every step

Courts expect contemporaneous records, such as MYOB or Xero entries, PPSR searches, correspondence with creditors, and evidence of security surrender. Unsupported assumptions will not survive judicial scrutiny.