Judgment against ‘pre-insolvency’ adviser for involvement in asset-stripping scheme

The Federal Court of Australia recently handed down a landmark judgment against a third party adviser for devising an asset-stripping scheme and breaching the creditor-defeating disposition provisions of the Corporations Act 2001 (Cth).

A creditor-defeating disposition is a disposal of company property that prevents, hinders or significantly delays that property from becoming available for the benefit of creditors in the winding up of the company.

Background

TSK QLD Pty Ltd (in liquidation) (TSK) carried on a substantial business providing recruitment and labour hire services. Pursuant to a scheme implemented in the 12 months prior to the appointment of administrators, approximately $10.3 million was withdrawn from the account of TSK and paid to entities associated with the director and senior management of TSK, and of Mr Benjamin Whitehouse, a ‘restructuring’ adviser (Adviser[1]).

The monies were paid pursuant to:

• a Sale Agreement wherein TSK purportedly sold its business, and its accounts receivable of some $11.199 million, to Torquejobs Pty Ltd (Torquejobs), an entity controlled by the CEO of TSK; and
• a Debt Collection Scheme wherein TSK appointed entities associated with the Adviser pursuant to an Agency Agreement to collect TSK’s debts.

The Adviser designed, documented and approved the scheme by which the monies were paid and purportedly valued TSK’s assets at nil. Almost $1.3 million flowed into the accounts of the Adviser and his corporate entities, and he and his companies retained about $431,000 of that amount.

On 21 March 2022, creditors resolved to wind up TSK, and liquidators were appointed (Liquidators). The Liquidators and TSK brought proceedings against each of the entities involved in the scheme; that is the director and senior management and their related entities, and the Adviser.

Judgment

The Adviser was the only party who appeared at the trial. He did not contest liability.

Accordingly, the only issue in dispute was the quantum of any judgment to be entered against the Adviser pursuant to the creditor defeating disposition provisions of the Corporations Act 2001 (Cth).

Quantum of loss and damage

The Adviser made submissions to the effect that his immediate liability should be limited to $431,000 (which was the amount of the benefit received by him pursuant to the scheme). The Court did not accept that submission, and instead assessed damages based on the total amount of the payments made by TSK pursuant to the scheme.

The Court then considered transactions between TSK and Torquejobs in issue between the parties and the effect of a settlement deed between the Liquidators and the other defendants on the award against the Adviser.

$2.106 million payments

The Liquidator identified that five payments totalling $2,016,623.74 were made to Torquejobs, of which the Adviser denied direct knowledge. The Court determined that the Adviser’s knowledge of the precise transactions which occurred in the implementation of the scheme was not the point. The Adviser knew all of the essential facts of his design of the scheme, and it was the design that was the breach of fiduciary duty by TSK’s director. Accordingly, the quantum of the award against the Adviser included the $2.016 million payments.

Employee entitlements assumed by Torquejobs

The Court found (and the parties agreed) that the amount awarded to the liquidators and TSK should be reduced by the value of the employee entitlements that were assumed by Torquejobs pursuant to the Sale Agreement.

Impact of liability of other Defendants

The Adviser sought an order to the effect that enforcement of any judgment amount be stayed by staggering dates to account for amounts agreed to be paid to the Liquidators by other defendants pursuant to a settlement deed. If payments were not made by those other defendants pursuant to the terms of the settlement deed, the judgement against the Adviser and his entities would become enforceable for the amount of the missed instalment.

The Court refused to make an order in those terms and held that the Plaintiffs should not be denied the opportunity of immediate recovery from the Adviser.

Judgment was entered in a total amount of between $5,527,190.35 and $7,293,814.09.

Key takeaways

• The creditor-defeating disposition provisions were introduced in 2020, and this is the first judgment involving a third-party adviser. In addition to the civil liability considered in this judgment, the creditor-defeating disposition provisions are civil penalty provisions. It remains to be seen if ASIC will commence proceedings. Advisers should consider the implications of the provisions, and this judgment, carefully.
• A third-party adviser who devised an asset-stripping scheme for a distressed entity was liable for the whole of the loss suffered by the entity; the adviser did not need knowledge of the precise transactions which occurred in the implementation of the scheme. It is enough for the adviser to know all of the essential facts of the design of the scheme.
• Despite only receiving a benefit of $431,000 the third party was ordered to pay damages of up to $7,293,814.09.

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Authored by:

David O’Farrell, Partner
Rachel Zagorskis, Senior Associate

[1] References to the Adviser include the related party corporate entities of the Adviser who were also defendants to the Proceeding.