Missed call means liquidator breaches section 180

A liquidator breached section 180 of the Corporations Act 2001 (Cth) because he did not personally telephone the director of the company to which he was appointed to demand the return of funds transferred from the company’s account the day before his appointment.  This finding of breach was upheld on appeal to the full Federal Court of Australia – Court of Appeal.1  The relevant findings are detailed below.

Click here for a link to the appeal (Asden Appeal) and click here for a link to the original decision (Trial).

Pre- appointment

The proceedings were commenced by the company, Asden Developments Pty Ltd (in liquidation) (Asden) through Mr Clout, the liquidator whom replaced the original appointees (Mr D and Mr C) three years after the first appointment.2  At trial, the company asked for damages payable by the former liquidators in an amount equal to the funds that were never recovered; $236,500.  Although the proceedings were brought against both Mr D and Mr C, the relief was only actually pursued against Mr D.

The sole director (and shareholder) appointed Mr D and Mr C on the advice of Mr Levis, a “pre-insolvency advisor” (Advisor) on 22 December 2010.  The appointment was found to be part of a “scheme” to limit the director’s personal liability following the withdrawal of support by its funders.  While not relevant to the findings of breach against Mr D, the “scheme” influenced the Court’s assessment of the director’s credibility which in turn influenced its findings on the loss actually suffered by Asden.  The “scheme” included the director’s receipt of $270,000 into the company’s bank account, which (on the advice of the Advisor) she effected a series of further transfers to a newly created company bank account, then to the bank account of a company controlled by the Advisor, which the Advisor in turn transferred to a new entity of which Asden’s director was also the sole director of.  Thereafter, Asden’s director passed a member’s resolution to wind Asden up.3

The liquidators’ consent was procured by the Advisor.  There was no suggestion that the liquidators were in any way complicit with the director’s (or the Advisor’s) “scheme.”

On appointment

On appointment, Mr D was provided the company’s bank statements, which revealed the withdrawal of some $236,500 the day before.  The liquidators discovered the funds had been withdrawn on the director’s authority.  They contacted the Advisor by email and telephone to enquire about the location of the funds; the Advisor told the liquidator the funds had not been received by the director personally and the liquidator should investigate the transfer further.  The Advisor went further to say that the funds were not held by the director personally (in fact, some of them were in the Advisor’s trust account, which he did not tell the liquidator).

Thereafter, Mr D wrote to the director (by letter) asking that she deliver up all property, assets (including money) and records of the company.  At trial, the liquidator gave evidence that he had reservations about the location of the funds, that he considered there was a real possibility that the director had removed them in breach of her duties but that he considered little was to be gained by him (as opposed to his staff) contacting director personally.  Mr D instead determined to conduct further investigations of the company’s records and to ultimately seek to publicly examine the director.  The public examination never proceeded.

While a report as to affairs was completed by the director, that document made no mention of the funds, had in fact been prepared by the Advisor (and seemingly simply signed by the director without further scrutiny) and failed to provide any personal contact details for the director, except via the Advisor himself.  It appears the liquidators relied on the contact information therein as the appropriate means to access the director.

Replacement liquidator

On the replacement liquidator’s appointment, Mr Clout commenced proceedings seeking damages against the former liquidators.  Mr Clout alleged that if the liquidator had personally telephoned the director to demand return of the impugned funds, the director would have done so.

At trial

At trial, the director gave evidence that she would have, in fact, arranged return of the funds if she had been personally asked by Mr D at the time because he “was the authority.”  The director’s evidence was found to be unreliable; the trial judge concluding that, having regard to the reliance the director placed on the Advisor, she would likely have followed the Advisor’s advice (as she had done up to then) and not transferred the funds.  The trial judge found the director was concerned, vigilant and astute to protect her personal financial position.

As to whether the failure to personally call the director, constituted a section 180 breach, both the former liquidators and Mr Clout tendered (unsurprisingly competing) expert evidence from fellow insolvency practitioners as to whether Mr D had acted prudently and diligently on appointment.  Mr D’s expert was not accepted because, the trial judge found, the report depended on Mr D’s reasons for not contacting the director.

The breach

Ultimately the trial judge concluded section 180 was breached because Mr D knew, shortly after appointment of the existence of the $236,500, knew of the transfer, knew the sole director and shareholder were the same, knew the director had arranged the transfer and was suspicious of the Advisor’s explanation for the transfer of funds and the funds’ whereabouts.

The trial judge made no award of damages arising from the breach, finding that in any event the director would not have acted on Mr D’s personal request to transfer the funds (even if made).

The trial judge went on to award Mr D his costs, notwithstanding Mr Clout, the replacement liquidator, had succeeded on the section 180 breach claim.

Both these aspects were appealed.

Court of Appeal

The Court of Appeal upheld the trial judge’s findings, with respect to both breach and costs.

Lavan comment

The Asden decisions offer guidance to practitioners on the Courts’ interpretation of section 180 in the context of an external appointment.  The Asden Appeal affirms the trial judge’s imposition of the Court’s expectations on practitioners and the role an appointee plays in an external appointment; it is clear that the appointee is expected to make appropriate and timely enquiries directly with the company’s officers.  The fact that Mr D was ultimately not ordered to pay any damages arising from the breach and awarded his costs (despite the finding of breach) are likely of little comfort in the circumstances.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.