Search and seizure application warranted: Illegal phoenix activity

The recent Federal Court decision of Scott v Southern Highlands Waste & Recycling Pty Ltd[1] provides liquidators with important guidance regarding the availability of search and seizure warrants under section 530C of the Corporations Act 2001 (Cth) (the Corps Act). Whilst the provision remains a useful mechanism for liquidators dealing with uncooperative directors, the Court has made it clear that warrants shall only be granted in particular circumstances as a remedy of last resort.

Background

The applicants, Mr Scott and Mr Pascoe, were appointed liquidators of All City Recyclers Pty Limited (in liq) (ACR) and ACN 106 976 354 (in liq) (formerly named Anderson Waste Services Pty Ltd (AWS)) on 18 December 2018 and 13 February 2019, respectively. These two companies were part of a group of family-controlled companies involved in a waste management and metal recycling business, operating from the same premises.

Potential phoenix activity

The respondent, Southern Highland Waste & Recycling Pty Ltd (SHW), was incorporated on 6 April 2016, shortly after ACR and AWS ceased trading in March 2016. SHW shared a former director and sole shareholder with the two former companies. The company also operated the same type of business that ACR and AWS ran, namely waste management and metal recycling, from the same premises. It also traded as ‘Anderson Waste Services’ and operated on a website owned by ACR.

Liquidators’ investigations

Throughout the course of the liquidators’ investigations, which were continuously hindered by a lack of cooperation from the directors, the liquidators became aware that SHW was operating using plant and equipment including trucks, trailers and forklifts belonging to ACR and AWS. There was no evidence of sales contracts for the transfer of assets.

On 19 March 2019, on behalf of ACR, the liquidators requested details of all of SHW’s assets and sought a formal undertaking not to dispose of the assets, other than in the ordinary course of business.

In a belated response, the solicitors of SHW acknowledged that certain plant and equipment of SHW appeared likely to be the property of ACR. However, the solicitors failed to provide a list of assets or a formal undertaking not to compromise the property, despite repeated requests.

On 30 April 2020, the liquidators sought an order of the Court for the issue of a warrant to search and seize plant and equipment which they claimed is property of the two companies.

Decision of the Federal Court

There were three primary questions considered by the Federal Court, namely:

1. The suitability of an ex parte application;
2. Whether the requirements of section 530C of the Corps Act were met;
3. If so, whether the Court ought to exercise its discretion to issue a warrant pursuant to the section.

Ex parte application

The application was made on an ex parte basis, which the Court considered appropriate on the basis that providing notice of the possibility of the issue of a warrant may frustrate the purpose and risk the respondent dealing adversely with the assets.[2]

Requirements under section 530C

The Court emphasised that whilst its power to authorise the issue of a warrant under section 530C of the Corps Act is discretionary, the discretion is only enlivened if the court is satisfied that the elements of section 530C(1) had been met.

This provision enables a Court to issue a warrant if:

• a company is being wound up or a provisional liquidator of a company is acting; and
• on application by the liquidator or provisional liquidator (as the case may be) or by ASIC, the Court is satisfied that a person:
  • 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 or provisional liquidator will be prevented or delayed; or
  • has concealed, destroyed or removed books of the company or is about to do so.

The first two elements were clearly met, as both ACR and AWS were being wound up and the warrant was sought by application of the liquidators.

The Court held that the third element, requiring property to be concealed or removed, will be satisfied if there is “a very real possibility the assets of the company have been taken over without any proper accounting“[3] or if “property has been transferred to another company without proper accounting and is being used in another company’s business“.[4]

Justice Jackson was satisfied that the assets of ACR had been, and continued to be, used in the business of SHW without proper accounting, on the basis of the following:

• ACR’s solicitors had acknowledged that certain assets were likely to be in the possession of SHW;
• there was evidence demonstrating that certain items of equipment at SHW’s registered premises were either registered in the name of ACR or appeared on ACR’s draft depreciation schedule; and
• the liquidator’s compulsory examinations of ACR’s Directors had also produced further evidence that SHW had begun to use much of ACR’s equipment at their former business premises, without purchasing the assets.

However, there was a lack of evidence establishing that any assets of AWS were in the possession of the respondent, thus his Honour did not consider it appropriate to authorise a warrant in respect of AWS.

Exercise of discretion

In considering whether the discretion ought to be exercised, Justice Jackson relied upon the often-cited decision in Cvitanovic,[5] which emphasised that a warrant under section 530C of the Corps Act must be a remedy of last resort once the liquidator has taken all reasonable precautions to acquire the property.

His Honour was satisfied that it was appropriate to issue a warrant in relation to ACR, taking into account the following factors:

• the liquidators’ previous efforts to ascertain and secure the property belonging to ACR;
• the respondent’s likely involvement in illegal phoenix activity based on the involvement of the same family members and the fact that SHW commenced trading from the same premises using the same business name, taking over the same equipment;
• the continued lack of cooperation by SHW, despite conceding that it was likely to have assets of ACR in its possession; and
• the fact that the recovery of plant and equipment was the only chance of obtaining a return for ACR’s substantial creditors, meaning that SHW’s evasion went ‘beyond irritation’.

Justice Jackson was satisfied that the potential risks presented to SHW by the warrant were mitigated by requiring the liquidators to be accompanied during the search and not disposing of any property until a further order of the Court. In order to further mitigate prejudice to SHW and encourage an expeditious resolution, the Court provided for any party wishing to claim an interest in the seized property to file a notice within 7 days of the warrant execution.

Key takeaways

The decision serves as a reminder that an application pursuant to section 530C of the Corps Act is to be a remedy of last resort for liquidators, once all other avenues have been exhausted. The Court has made it clear that it will not authorise the issuing of search and seizure warrants lightly, as they are viewed as a serious incursion upon the rights of the persons affected by the warrant.

However, the provision remains a useful mechanism to strengthen liquidators’ abilities to take control of company property, particularly if they are able to prove a pattern of non-cooperation and evasion on the part of the Directors. The Court will also take into account any reasonable inferences of illegal phoenix activity when deciding whether to exercise its discretion under the provision.

Authored by:

Guy Edgecombe, Partner
Matilda Kelly, Lawyer