Losing the war because you can’t front up to battle
The frustrating challenges faced by Liquidators in pursuing a potential right of action
October 25, 2019
We understand the frustrations expressed to us by creditors who lose money when a company enters into external administration. Though not our doing, we often receive the brunt of the gripes from creditors in the form of angry telephone calls and emails, but often to the credit of these aggrieved parties, we are often seen for what we are – objective and independent professionals who do our best to clean up the inherited matters and make the best of a less than ideal situation for stakeholders.
Part of a Liquidator’s role is to review and report on the past affairs of an insolvent company and in some cases that means investigating the actions of directors and related parties. In some cases, this can mean impropriety – in the form of asset transfers, breaches of directors’ duties and alteration of company records to benefit related entities.
Reporting such matters to the corporate regulator, the Australian Securities & Investments Commission (“ASIC”), often results in little interest being taken by them, in terms of getting involved with all of the powers and funds they have at their disposal, particularly in the SME space. And we understand that – by its own admission, ASIC’s litigation fund has declined between the 2017/18 financial year and 2018/19.
ASIC has a wide ranging remit in this country and a great many number of responsibilities and cases to follow. Matters that are in the interests of the public, or those that attract newspaper headlines are typically actioned. However it can become disheartening to the insolvency profession when ‘lay down misere’ type matters that we find do not attract any follow up from ASIC.
The next frustration occurs at the point of initiating recovery actions off our own bat – on three counts:
- Lack of records and evidence
Former employees and creditors often have a fair bit of anecdotal information to supply to us when we carry out our investigations. Allegations about shadow directors and what company funds were used for are common matters that are raised with us, but this information often lacks evidentiary substance when we dig a bit deeper, which often means we cannot act upon it.
Additionally, MYOB records and financial statements are only as good as the information and supporting documents that go into putting them together, so if we do not receive all of the company records, there is only so much we can do in terms of ascertaining the bigger picture of what is going on.
- Lack of funding from other parties
It is not uncommon for us to ask creditors or other parties to fund our investigative and recovery efforts. It makes sense to approach the largest creditors first – after all, they will benefit the most from a pari passu distribution if the recovery efforts prove to be successful.
Having said that, creditors are understandably reticent about potentially losing more money on what might be a fruitless recovery exercise. Whilst there may be a lot of interest up front about getting involved, writing out a cheque in favour of liquidation and legal fees is a whole different exercise.
Litigation funders are out there, but often will not get involved on smaller type SME matters where the stakes are not all that high.
- Limited insight into the financial circumstances of the target
Liquidators do not possess any additional powers to investigate the affairs of any other entities or potential targets for which they are not the appointed Liquidator. Aside from the public examination avenue described above (which can be costly), we can perform searches of public registers, just like anyone else can, like the ASIC register or Landgate to determine land ownership in Western Australia.
We can ask directors and other entities to supply us with details of their assets and liabilities, but such requests require cooperation from the other side – we cannot compel others to comply.
This leaves us with an all too often experienced situation – hints of wrong doing, but no way to move to a position of resolution for the benefit of creditors.
So in summary, for a Liquidator to be successful in making a recovery in cases where assets have gone sideways, a fair bit has to go right from the start – in terms of evidence, funding and a target to make a recovery from.
About the author
Greg Quin is a Director at HLB Mann Judd Insolvency WA and has been with the team for 10 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to email@example.com.