In Focus: Pre-Insolvency Advisers

[First published on Linkedin.com on November 16, 2016]

Asden Developments Pty Ltd (in liq) v Dinoris (No 3) is a very recent Federal Court decision which deals with a claim by a replacement liquidator that his predecessor breached his duties. Most of the public analysis of the case is focused on what the decision says about the duties of liquidators – but there is another aspect that deserves attention. The judgement also provides considerable detail about the activities of a ‘pre-insolvency adviser,’ and those activities raise significant questions about the role and purpose of such advisers.

Background

Asden was used as the vehicle by which a family conducted real estate development. According to the sole director’s evidence, the land purchase and financial arrangements were negotiated by her then father-in-law, whilst much of the construction activity was undertaken by her then husband who was apparently precluded by bankruptcy or impending bankruptcy from undertaking a role as a director.

At around the same time as the development experienced financial pressure due to delays and defects in construction, the director and her husband separated. At first the separation did not appear to affect the family’s willingness to support the financial position of the company: the father-in-law advanced $50,000, and then a further $270,000 about a fortnight later; but a day or two after the last advance she was told that there would be no more support and that the company’s debts were ‘her problem.’

Concerned about her position as a director of a company that might be insolvent, the director sought advice from her accountant, who referred her to a consultant pre-insolvency adviser.

The consultant advised her to incorporate a company, TJI Investments, and to transfer $264,000 from the main company bank account into another account in the same name with the Bank of Queensland.

There was a series of payments following her receipt of a formal demand for the return of the $270,000 a few days later. The director used $22,000 to pay for a new car, and transferred the balance of $236,500 into the bank account of a company controlled by the consultant. The consultant’s company retained $56,500, and transferred the balance of $180,000 into a bank account operated by the newly incorporated TJI Investments. Two days after the last payment the director initiated the winding up of Asden, with $10,000 from the $56,500 used to make a contribution towards the costs of liquidation.

The liquidator’s standard letters led to information from the Bank of Queensland detailing the $236,500 withdrawal, and further investigation confirmed that the director had signed the withdrawal. The liquidator called the consultant seeking further information and was told that the funds were not received by the director ‘personally,’ and that the liquidator should investigate further.

At around the same time the liquidator received correspondence from the family’s solicitor claiming that the $270,000 was not the property of the company but rather that it had been provided to the director personally, specifically to fund the payment of creditors, and was therefore subject to an express trust. Shortly thereafter the family initiated legal action against the director, and the consultant and his company, to pursue the trust claim. That legal action was successful, and the judgement led ultimately to the bankruptcy of the director and the consultant, and the winding up of his consultant’s company. They also recovered the residual balance of the TJI Investment account, which by that time had been transferred to a solicitors’ trust account and had been further depleted by the director’s legal fees.

Separately, the liquidator instructed an auctioneering firm to make arrangements to sell a boat owned by the company that was secured to a finance company. The boat was sold at auction, and net proceeds after GST, costs and commission were disbursed by three payments: $21,000 to TJI Investments – which had paid out the finance company, $9,790 to a second company associated with the consultant, and $4,933 to the liquidator.

The Federal Court judgement

The two main issues at trial were whether the liquidators’ failure to more actively pursue the recovery of the funds – most notably by personally contacting the director – and failure to prevent the $9,790 payment to the consultant’s company were a breach of his duties as liquidator.

The liquidator gave evidence that he was unable to personally contact the director because he did not have her telephone number or email address – when first approached by the consultant he had been told that the director ‘was under a lot of pressure and stress by reason of a family dispute’ and that the consultant wanted to be the point of contact.

Maddocks have provided a concise and useful discussion of the liquidator’s duties but in summary the Court held that that there was no breach of duty as regards the disbursement of the boat proceeds because the liquidator had appointed an agent to sell the boat on his behalf, and he was entitled to assume that the agent had properly discharged his duties by properly scrutinising the costs and disbursements.

The Court found that the liquidator had breached his duty as liquidator by failing to make any personal inquiry of the director about the transferred funds, but held that there was no loss because however active his pursuit the director would not have repaid the monies – notably declining to accept her evidence that that she would have repaid the monies if asked.

The role of the pre-insolvency adviser

If we extract and summarise the pre-insolvency adviser’s activities and involvement, he:

  • Netted $46,500 for the services provided to the director and received almost $10,000 for his involvement in the collection of the boat and arranging for the finance company’s debt to be paid out.
  • Constructed an ‘elaborate’ scheme which put the $264,000 out of reach of both the liquidator and the subsequent claimants.
  • At best – failed to assist the liquidator’s investigations by failing to provide details of the transfer when asked about the withdrawal, and apparently telling the director that she did not need to respond to the liquidator’s correspondence.

The family recovered approximately $173,000 but incurred significant legal fees, and the shortfall resulted in the director’s bankruptcy – a consequence that might have been avoided if she had acted to preserve the funds rather than disperse them. Of course, the consultant also became bankrupt, but that is hardly a consolation to the rightful owner of the funds, or the director.

If the director had consulted a registered liquidator then there would have been assurance via the statutory registration process that the liquidator was appropriately skilled and educated, supervised by ASIC, covered by professional indemnity insurance, and subject to the ethical standards of at least one professional body – rather than an unregistered, unsupervised and uninsured – but expensive – consultant.

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