The circumstances of appointment of a provisional liquidator

In the matter of Colorado Products Pty Limited [2011] NSWSC 1225 demonstrates the circumstances in which a court will appoint a provisional liquidator. Briefly, this case concerned a bathroom accessories business, Colorado, whose three directors shared full ownership. At one time, all the assets of the company were sold to a third party. A stocktake found stock missing and unaccounted for (evidence pointed to removal by one director) and diversion of payment from Colorado's debtors to another company (by the same director). 

The court found that the grounds for an urgent appointment of a provisional liquidator were satisfied and that the balance of convenience favoured external administration because:

• There was a seriously arguable case for winding up, in that there was clear evidence of a rupture among the shareholders, that the company's substratum was gone and that the purpose for which the shareholders had come together (in this case, a bathroom acessories business) had come to an end.
• On the evidence there were clear grounds for an inference that Colorado's assets were in jeopardy.
• The company was not trading and so appointing a provisional liquidator would not jeopardise the company's trading reputation and there was no evidence of risk that external administration would trigger ancillary enforcement action.

Liquidators and litigation funding - confidentiality of agreement

In Lion Energy Ltd v Tulloch Lodge Limited (in liq) [2011] FCA 1139, the Federal Court approved a company in liquidation's entry into a litigation funding agreement and the compromise of a claim of the company. The court agreed with the liquidator's assessment that those acts would be in the best interests of the company. However, the court refused to grant an order that the litigation funding agreement be kept confidential as such an order restricting publication was not necessary to 'prevent prejudice to the administration of justice' under the Federal Court of Australia Act 1976 (Cth).

This case is therefore a warning to liquidators contemplating entry into litigation funding agreements. Even if the court approves the decision to enter into such an agreement, it will be unlikely to grant an order to maintain the confidentiality of its terms given the high threshold set by the Federal Court of Australia Act for such a restriction.

Proposed reforms to insolvency industry regulation

The way the insolvency industry is regulated could be reformed under proposals contained in a Federal Government paper. The reform is aimed at promoting a high level of practitioner professionalism and competency, and increased efficiency in insolvency administration.

Partner Michael Quinlan, Lawyer Laura Racky and Summer Clerk Nicole Meyer report.

Extension of relief by ASIC for litigation funders and proof of debt funders

In July 2011, in the light of some court decisions holding litigation funded class actions to be 'managed investment schemes', which would force litigation funders to comply with the requirements for such schemes in the Corporations Act, the Government released for public consultation a draft of proposed regulations to clarify that litigation funding schemes and proof of debt funding schemes are not managed investment schemes.

In order to allow the Government time to facilitate this, ASIC recently announced that it would extend the operation of its interim class order relief (Class Order 10/333) until February 2012, which will enable those funding schemes to be temporarily exempt from the requirements of the Corporations Act (which requirements include holding a financial licence and the attendant obligations, preparing a product disclosure statement, and providing ongoing disclosure.

Director sentenced to jail for insolvent trading

The County Court of Victoria has this week sentenced Ms Anula Kumari Kauye, former director of International Consulting Group Pty Ltd (ICG), to jail for three years and two months following charges brought by ASIC.

Ms Kauye had pleaded guilty to engaging in insolvent trading, theft and providing a false affidavit. In the County Court proceedings, ASIC had alleged that Ms Kauye had allowed ICG to trade whilst insolvent and had stolen funds from US companies. When a creditor issued a statutory demand in relation to ICG's debts, Ms Kauye provided an affidavit containing false details about the use of the funds in order to set aside the statutory demand.

ASIC has issued a media release about the decision in which ASIC Commissioner Michael Dwyer said that:

Directors must be aware that they breach the law if they incur debts when a company is insolvent or likely to become insolvent. The law is designed to deter directors from incurring debts to unsuspecting creditors of a company. Directors should take action early and seek appropriate advice.

This decision is a rare example of a director being sentenced to imprisonment for breaching the Australian insolvent trading laws.