Failing to seek advice costs directors, creditors
As insolvency practitioners, we have a duty to investigate company affairs and in particular whether there are any voidable transactions committed by the company and/or its officers. We are often frustrated when we establish the existence of a claim, but are unable to take legal proceedings in respect of the claim. Typically, the major barrier to commencing legal proceedings is the cost, which is becoming increasingly prohibitive.
Recently in our Melbourne office we were further frustrated when a claim pursuant to section 588FDA of the Corporations Act 2001 was established against a director and his spouse (defendants). But, unfortunately for all parties involved, the defendants refused to seek legal advice and insisted upon being self represented.
The claim involved a dispute over the validity of a second ranking security held by the defendants over three real properties owned by the company. The properties were ultimately sold by the first mortgagee leaving surplus funds of approximately $160,000. These funds became the focus of the dispute in which we claimed that the second ranking security was void under section 588FDA (unreasonable director-related transactions) and, therefore, the company was entitled to the surplus.
It became evident from our initial communications with the defendants that they would not consider withdrawing their claim to the surplus funds. Given the strength of our claim, walking away was not an option. That being the case, we saw no alternative other than to engage legal representation to pursue the recovery of the funds. Our solicitor made repeated efforts to resolve the dispute without the need for expensive legal proceedings; however, the defendants were resolute that their security was valid. Primarily, we attribute this to the fact they did not seek appropriate legal advice.
Despite our confidence in the strength of our claim, we took a cautious approach and publicly examined the defendants to try to elicit any information that might prove detrimental to the claim (of which there was ultimately none).
As it turned out, the examination’s evidence identified several additional claims and reinforced our claim in relation to the security.
After the public examinations, we made further unsuccessful attempts to settle the claims against the defendants. There appeared to be no prospect of a settlement and so we commenced legal proceedings against them.
The defendants remained unrepresented during the preliminary stages of the proceedings, which created significant delay and further costs, as they couldn’t properly manage their defence. At the direction of the court the defendants engaged legal representation and following mediation, we were able to resolve the dispute on the basis that the company receive all the surplus proceeds from the real properties plus an additional amount from the defendants. We understand that the defendants are selling their family home (being their only material asset) to pay the settlement sum.
We can only assume that had the defendants sought legal advice and representation earlier in the dispute, and before being publicly examined, they would have accepted the strength of our position and withdrawn their claim to the surplus proceeds of sale. Importantly, they could have obtained advice for a reasonable cost that would have been a far better outcome than losing a large portion of the equity in their home—and the additional stress of a protracted legal dispute.