A creditors’ voluntary liquidation usually brings about an orderly set of particulars, accounts and all supporting legal documentation. When a hospitality business walked through Worrells front door, the facts appeared, on the surface, to be very simple. The business had been sold and there were only three creditors at play. But as investigations played out, it turned out to be much more complicated.
- Only asset remaining from the sale of the business was $20K
- Shareholder capital $100K
- Australian Taxation Office (ATO) owed $25K
- Accountant owed $880
The first order of business was the routine task of closing the bank account and getting the proceeds forwarded to our office. In this process it was found that the closing balance was in fact $42K not $20K. The bank duly obliges, and forwards these funds.
Out of the blue we receive a phone call from a former business partner, stating that the funds we have received from the bank are in dispute, and should never had been released as 30% of the monies belonged to him.
A few days later, the bank calls us to say that there has been a mistake. In essence, they tentatively ask; if they could please have it back. We naturally and very respectfully decline their request.
In speaking with the accountant we learn that the company was in partnership with this former business partner, as a trustee of the trust that traded the business. And that another creditor is owed money in the form of a lease company.
The lawyers acting for the former business partner submits the partnership agreement that stipulates a 20% entitlement to the profits. Not 30% as claimed by the former partner himself. Again we naturally and very respectfully hone in on this discrepancy and ask for more substantiating evidence to the claim of 30% as made by their client. In return we receive a deed of settlement and a request to use the funds we hold to pay an ATO bill in a separate partnership entity, and a request to pay their client 50% of the surplus to boot!
Our investigations find:
- The separate partnership entity has no rights over this winding up
- The ATO debt is owed in part
- The former partner is only entitled to 30% of the surplus
- The company lease and accountant’s debt are validated
Once all due processes are made and our report to creditors is finalised, we set wheels in motion to distribute the dividends. That is, until one more dispute raises its head. The former business partner and the accountant are in a standoff. The accountant is holding the company tax returns hostage until his bill is settled. And the owner is withholding consent for payment until the tax returns are lodged.
Eventually a mechanism, as proposed by Worrells, is agreed upon and the accountant is paid. We are often asked; ‘What forensic accounting is there is insolvency?’ We think this example answers this case in point.
The point of this saga: liquidation is not just about sending assets to auction and paying out the proceeds. Very often incomplete evidence is given to us and we can’t help wondering if the axiom “oh what a tangled web we weave when first we practice to deceive” applies.