Misappropriation of Company Assets Led to Lawsuits – Insolvency/Bankruptcy

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Each year, the Australian Securities and Investments Commission (ASIC) assesses thousands of director and officer misconduct reports. Reported misconduct comes to the attention of ASIC in a number of ways, including registered liquidators filing statutory reports. ASIC considers a number of factors when deciding whether to investigate and take enforcement action against the offender. Between July and December 2021, ASIC enforcement action resulted in the following results:

  • $84.3 million in civil penalties imposed by the courts.

  • 99 people or companies prosecuted for strict liability offences.

  • 21 persons or entities excluded or restricted from providing financial or credit services.

  • 31 people disqualified or revoked as company directors.

  • 6 people sentenced to custodial sentences and 10 people or companies sentenced to non-custodial sentences.

In a recent liquidation, misconduct by the manager reported to ASIC led the Director of Public Prosecutions (DPP) to prosecute the manager. This resulted in recoveries in the liquidation which will allow a dividend for the company’s creditors.

Paul Burness was appointed liquidator of Sehgal Catering Services Pty Ltd in 2019. When the catering business’s financial difficulties began in 2016, the business opened a restaurant in Melbourne’s CBD to supplement its income. However, the restaurant was unsuccessful and could not meet its high operating expenses, mainly its rental costs. As a result, the restaurant closed in early 2018. The business continued to operate the restaurant business until shortly before the appointment into liquidation.

Among other assets, the company’s financial statements revealed a trade debtor that owed $84,018. In response to our request, the debtor confirmed that the amount had been paid in full, however, he subsequently provided documentation revealing that on the day before the liquidation appointment, the sole administrator of the company asked the debtor to pay $55,099 into an account not held by the company.

Our subsequent discussions with the Debtor revealed that this Debtor continued to do business with another company operated by the Director, which provided similar services. Our investigations have identified that this company was incorporated two days after the filing of the liquidation request. Phoenix’s unlawful considerations aside, the director clearly instructed the debtor to pay the funds to himself or the other company. This gave rise to a complaint against the director.

We asked the manager to refund the misappropriated funds and despite the admission of misuse, the funds were not refunded and the manager stopped communicating with us.

The director’s actions were clearly not in the interest of creditors, he attempted to conceal assets from the liquidator, he provided false information to the liquidator and he used information for his own benefit. In accordance with our obligations, we have considered the following directors’ breaches of duty under the
Companies Act 2001:

  • Article 180 – Care and diligence;

  • Article 181 – Good faith;

  • Article 182 – Use of post;

  • Article 183 – Use of information;

  • Article 184 – Good faith, use of position and use of information; and

  • Article 590 – Offenses committed by the directors of certain companies.

We reported the Director’s misconduct to ASIC under Section 533(1) of the Companies Act and a further report was submitted following a subsequent request by ASIC (Section 533(1) 2) of the Act).

After reviewing our report and the documentary evidence, ASIC referred the matter to the DPP to consider prosecuting the director. Shortly after the DPP filed their suit, the Director offered to refund the funds and we subsequently received the funds in full. These funds will be used to pay a dividend to the company’s creditors. The proceedings against the DPP are ongoing and the director has not yet been convicted.

This liquidation is an example of how ASIC’s assistance with the DPP can lead to recoveries even when an administrator avoids communications with the liquidator, proving it is in the interests of debtors and administrators alike. be honest and do the right thing by the creditors. If we detect any wrongdoing, it is our duty to try to right those wrongs by reporting them to regulators and other convenient and business channels.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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