From whitegoods to white-collar crime.
Once synonymous with ovens, cooktops and other appliances, Kleenmaid now has notoriety for corporate crime. On 10 January 2020, Kleenmaid’s group of companies’ former director and founder, Andrew Eric Young, was sentenced to nine years’ imprisonment on 7 February 2020, following charges heard in the District Court of Queensland arising from the voluntary administration in 2009.
Following a 59-day trial, the jury found Mr Young guilty of fraud and criminal insolvent trading charges:
- One count of fraud by dishonestly gaining loan facilities totalling $13 million from Westpac in 2007.
- Two counts of criminal insolvent trading of debts of $3.5 million relating to two additional loan facilities from Westpac in 2008.
- Fifteen counts of criminal insolvent trading of debts over $750,000 incurred during a seven-month period (October 2008 to April 2009).
- One count of fraud by dishonestly causing $330,000 to be transferred from a Kleenmaid company bank account to a separate company bank account that Mr and Mrs Young held an interest in (to benefit from the payment)—just prior to administrators being appointed.
This latest conviction, follows the 2015 and 2016 convictions of two other former Kleenmaid directors; Gary Collyer Armstrong, sentenced to five and a half years’ jail, and Bradley Wendell Young, sentenced to nine years’ imprisonment. The aftermath of the 2009 voluntary administration and subsequent liquidation has spanned across eight years, including a three-year registration suspension of Kleenmaid’s auditor in 2014.
In light of this recent prosecution by the Australian Securities and Investments Commission (ASIC)—it is timely to consider the Corporations Act 2001 insolvent trading provisions.
Section 588G of the Corporations Act provides a director has a positive duty to prevent insolvent trading, which occurs when directors allow their company to incur debts when the company was insolvent. A liquidator can make a compensation claim against a director if those debts are unpaid when the liquidation commences. A director may be held personally liable to compensate creditors for the total unpaid debts incurred from the time the company became insolvent to the start of the liquidation. Generally, a liquidator will take an action for insolvent trading if commercial in the interests of creditors.
Section 588G is breached under the following circumstances:
- a person is a company director when the company incurs a debt
- the company is insolvent at that time or incurring that debt creates the company’s insolvency (as defined under section 95A)
- there are reasonable grounds for suspecting the company’s insolvency status or would become insolvent.
Following any breaches, civil and potentially criminal consequences could apply. And as the Kleenmaid convictions show, ASIC’s prosecution of criminal offences under the Corporations Act can be severe. For civil penalties, section 588G(2) of the Corporations Act applies to directors when:
- a person is aware of grounds for suspecting insolvency
- a “reasonable person” in a similar position would be aware of the company’s circumstances.
Section 588G(3) provides a criminal offence occurs when the above elements are met, and when the person’s failure to prevent the company incurring the debt was dishonest.
Determining insolvency is a complex area and every situation is different; however, the following indicators outlined by the Court of ASIC v Plymin, highlight some practical warning signs for directors to consider.
- continuing losses
- liquidity ratios below 1
- overdue Commonwealth and State taxes
- poor relationship with present Bank, including inability to borrow further funds
- no access to alternative finance
- inability to raise further equity capital
- suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply
- creditors unpaid outside trading terms
- issuing post-dated cheques
- dishonoured cheques
- special arrangements with selected creditors
- solicitors’ letters, summons[es], judgments or warrants issued against the company
- payments to creditors of rounded sums, which are not reconcilable to specific invoices
- inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.
Directors having a complete understanding of company’s affairs is the key to monitoring its solvency and taking action early—if required. And if they discover or suspect their company is insolvent, you should obtain advice from an appropriate qualified accountant, lawyer and/or insolvency practitioner about the options available for dealing with financial difficulties.
Directors’ whose company is insolvent or likely to become insolvent in the near future, must take immediate action to avoid the consequences of breaching the relevant provisions of the Corporations Act.
Related article: The effectiveness of the safe harbour regime
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