The Federal Court decision of Connelly (liquidator) v Papadopoulos, in the matter of TSK QLD Pty Ltd (in liq)(TSK) [1] highlights the serious implications for directors and officers of companies and professional advisers involved in restructuring of companies which are later found to be asset-stripping schemes.
TSK, a recruitment and labour hire company faced financial difficulties which led to their liquidation. An external accountant adviser, holding himself out as a restructuring specialist, created what was found by the Court to be an asset-stripping scheme that benefitted the company’s top executives and the adviser himself.
The Court ruled that the adviser’s design of the scheme breached his fiduciary duties, regardless of his lack of direct involvement in the transactions of the scheme. This case highlighted the risks for advisers and directors when devising restructuring schemes which fail to comply with current lawful requirements to restructure especially where the court’s focus is on ensuring recovery for creditors.
Background
TSK QLD Pty Ltd (TSK) operated a business providing recruitment and labour hire services to energy industries. TSK however faced financial difficulties and in 2022, administrators were appointed before it was ultimately placed into liquidation.
During 2021, TSK was subject to restructuring activity orchestrated by an external accountant adviser, who held himself as a specialist in ‘restructuring’. In this scheme, approximately $10.3 million was extracted from TSK and then paid to its director, CEO, CFO, the accountant adviser and their respective corporate entities.
These payments were paid under a structure of a:
Sale Agreement where TSK purportedly sold its business to an entity controlled by its CEO; and
Debt Collection Scheme where TSK allegedly appointed entities associated with the external accountant adviser to collect TSK’s debts.
The liquidators (Plaintiffs) alleged that the company had suffered $8.85 million in losses due to this asset stripping scheme and commenced recovery proceedings in the Federal Court.
Issues and Court Findings
At trial, the external accountant adviser and his companies were the only defendants to appear. While he effectively conceded liability to devising the scheme, he argued over the amount of damages alleged to have been incurred. . The liquidators had already settled with the other defendants, being the director and officers of the company in liquidation out of court.
Issue: Breach of Fiduciary Duty
In late October to early November 2021, funds were transferred to TSK from a third-party entity as part of a debt collection process. During the same period, TSK made multiple payments totalling $2.106 million to Torquejobs, one of the corporate entities involved in the restructuring activities.
The external accountant adviser claimed that he did not have direct involvement with the precise transactions that took place in the implementation of his restructuring plan. He argued that the internal accounting team at Torquejobs was responsible for the movement of money between TSK’s and Torquejobs’ bank accounts.
The court ruled that the adviser’s knowledge of all essential aspects of the scheme’s design, as evidenced by a diagram he created, was sufficient to establish a breach of fiduciary duty. The design of the scheme itself constituted the breach, regardless of the advisor’s direct involvement in the specific transactions.
Issue: Delaying Judgement
The external accountant adviser argued to delay payment of the judgement, as the liquidators would recover some of TSK’s losses from future payments made under settlement agreements with other defendants. He submitted that the Plaintiffs had obtained security to support those future payments. He also submitted that a judgement immediately enforceable would cause him a risk of bankruptcy as he did not have any interest in real property.
The Court rejected these submissions for two key reasons:
the Court prioritised the Plaintiffs’ opportunity to recover immediately from the defendant. The fact that future payments might be received from other defendants did not justify delaying the recovery process; and
the submissions of the adviser relied on the Court’s discretion under rules 41.03 and 41.11 of the Federal Court Rules 2011 (Cth) to stay its orders in order to prevent ‘irremediable harm’ or ‘serious injury’ to a party, but no such harm was substantiated in this case.
The Court declined to make the orders sought by the adviser to delay judgement payment.
Take Away
If you are a director or officer of a company involved in restructuring activity, you can be held liable for breaches of fiduciary duty implementing a scheme provided by a qualified professional adviser. It is important that you understand your duties and responsibilities as a director and officer to the company and its creditors.
If you are a professional adviser involved in restructuring activity, you can be held liable for breaches of fiduciary ’ duties for creating a scheme and its implementation even if you are not directly involved in the transactions to give effect to the devised scheme. It is important that you understand the lawful means of engaging in restructuring of companies in particular your duties and responsibilities as a professional adviser.
If you would like to discuss this article or any restructuring that you are considering engaging in please contact:
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Inshani Ward
Senior Associate
T: +61 3 9611 0110 | M: +61 413 557 157
E: iward@sladen.com.au
Ben Wyatt
Principal Lawyer
T: +61 3 9611 0115 | M: +61 409 173 928
E: bwyatt@sladen.com.au
[1] [2024] FCA 888
