You can run but you can’t hide: Liquidator warrants to search for and seize property, books and records

In the recent case of Naidenov (liquidator) v Davey, in the matter of Josa Civil Group Pty Ltd (in liq) [2021] FCA 1175, the Federal Court considered an application by the liquidator of Josa Civil Group Pty Ltd (the Company) for the issue of warrants under section 530C of the Corporations Act 2001 (Cth) (Act) to search for and seize property or books of the Company.

Pursuant to section 530C of the Act, on the application of a liquidator (or ASIC), the Court may issue a warrant to authorise a person to search for and seize property or books of the company in the possession of a person.

Further, section 530C(3) of the Act provides that the authorised person may, if necessary, break open a building, room or receptacle where the property is or the books are, or where the person reasonably believes the property or books to be, in order to seize the property or books under the warrant.

Background

The Company was incorporated in August 2015 and operated as part of the JG Group, carrying out sewage and water civil construction works.  The Company was placed into liquidation on 5 May 2020.

The liquidator of the Company (Liquidator) was also appointed to two related companies in the JG Group, Josa Constructions Pty Ltd (in liquidation) (Josa Constructions) and Equipment Hire Pty Ltd (in liquidation) (Equipment Hire).

The Liquidator’s investigations identified several possible causes of actions relating to (amongst other things):

  • the existence of a scheme designed to defraud the ATO by the non-reporting and non-payment of the Company’s taxation liabilities; and
  • whether the business of the Company, Josa Constructions and Equipment Hire may have been illegally phoenixed to one or more companies within the broader JG Group.

The Liquidator issued letters and notices pursuant to section 530A of the Act to the first defendant, who was the Company’s sole director and secretary at the time the Company went into liquidation, seeking production of books and records of the Company.  However, the first defendant failed to produce any documents.  The Liquidator also noted that the first defendant had been appointed as director and secretary of the Company in April 2020, less than 3 weeks before the Company went into liquidation.

The Liquidator then issued section 530A notices to the second defendant, who had previously been the Company’s sole director and secretary from the incorporation of the Company up to late March 2020, and who was also a 50% shareholder of the Company.  The second defendant produced some tax invoices and payment confirmations issued by the Company but failed to produce any other documents.

Finally, the Liquidator then issued requests to the third defendant, who was the other 50% shareholder in the Company, for the production of books and records of the Company.  Importantly, the third defendant provided the Liquidator with a series of spreadsheets regarding past transactions of the Company which led the Liquidator to conclude that the author of the spreadsheets must have had access to a considerable quantity of books and records of the Company which had not been provided to the Liquidator.

In addition to the above matters:

  • the Liquidator identified that there were 17 motor vehicles last registered in the name of the Company including a Ferrari, a Mercedes Benz and a number of Harley Davidson motorcycles (Company Vehicles), and that while none of these vehicles were currently registered there was also no record on the register of the vehicles having been transferred to any other party;
  • there was no evidence of the Company having received payment for any of these vehicles; and
  • despite specific queries, each of the first, second and third defendants denied that they were aware of any motor vehicles belonging to the Company.   

The Liquidator then applied to the Court under section 530C of the Act for the issue of warrants for the search and seizure of the books and records of the Company, as well as the Company Vehicles.

The Decision

There are three requirements for the issue of a warrant under section 530C of the Act:

  • the company is being wound up;
  • the application is made by a liquidator; and
  • the Court must be satisfied that the person to be the subject of the warrant has:
    • concealed or removed property of the company with the result that the taking of the property into the custody or control of the liquidator will be prevented or delayed; or
    • concealed, destroyed or removed books of the company or is about to do so.

In considering the application, Justice Halley noted that an order pursuant to section 530C of the Act has been described as ‘a remedy of last resort’1 and should only be granted if the Court finds that there has been a ‘persistent pattern of non-cooperation and evasion’.2

Justice Halley also noted that relevant factors in deciding whether a person has concealed or removed property of the company include:

  • refusals to comply with liquidators’ requests to deliver up books and records;
  • transfers of assets to, or use of assets by, related companies without proper accounting; and
  • moving assets, books or records from one place to another.

Overall, Justice Halley was satisfied that there had been a ‘persistent pattern of non-cooperation and evasion’ given the repeated and unexplained failures by the defendants to comply with the requests and notices issued by the Liquidator, the seriousness of which was exacerbated by the apparent failure of the Company to comply with its tax obligations.

The Court found that the defendants had concealed or removed property of the Company, and had concealed, destroyed or removed books of the Company or were about to do so, and issued the warrants sought by the Liquidator.

Lavan comment

This decision is a useful reminder of the tools available to a liquidator to search out and obtain the property and the books and records of the company in liquidation.

While a warrant under section 530C of the Act will only be issued as a last resort, the Court will come to the aid of liquidators where there has been a persistent pattern of non-cooperation and evasion.

If you have any questions about the issue of a section 530C warrant, or responding to one, please contact the Lavan team.

13 October 2021
Insolvency Updates
AUTHOR
Lawrence Lee
Partner
AUTHOR
Dean Hely
Managing Partner
AUTHOR
Joseph Abberton
Partner
SERVICES
Recovery, Reconstruction and Insolvency


FOOTNOTES

[1] Cvitanovic v Kenna & Brown Pty Ltd (1995) 18 ACSR 387

[2] Whitemore Holdings Ltd (in liquidation) [2004] FCA 806