Misappropriation of company assets led to director prosecution

You can run but you can’t hide.

Each year, the Australian Securities and Investments Commission (ASIC) assesses thousands of reports about directors’ and officers’ misconduct. The reported misconduct is brought to ASIC’s attention in several ways, including registered liquidators lodging statutory reports. ASIC considers a number of factors when deciding whether to investigate and take enforcement action against the offender. Between July and December 2021, ASIC’s enforcement action resulted in the following outcomes: 

• $84.3 million in civil penalties imposed by the courts.

• 99 people or companies prosecuted for strict liability offences.

• 21 people or entities removes or restricted from providing financial services or credit.

• 31 people disqualified or removed as directors of companies.

• 6 people given custodial sentences and 10 people or companies given non-custodial sentences.

In a recent liquidation, the director’s misconduct reported to ASIC resulted in the Director of Public Prosecutions (DPP) prosecuting the director. This resulted in recoveries in the liquidation that will enable a dividend for the company’s creditors. 

Paul Burness was appointed as liquidator of Sehgal Catering Services Pty Ltd in 2019. When the catering business’s financial difficulties started in 2016, the company opened a restaurant in Melbourne’s CBD to supplement its income. However, the restaurant was unsuccessful and could not meet its high operating expenses, mainly its rental costs. As a result, the restaurant closed in early 2018. The company continued operating the catering business until shortly prior to the liquidation appointment.

Among other assets, the company’s financials disclosed a trade debtor owing $84,018. In response to the demand we issued, the debtor confirmed the amount was paid in full, however, they later provided documentation revealing that on the day prior to the liquidation appointment, the company’s sole director instructed the debtor to pay $55,099 to an account not held by the company.

Our subsequent discussions with the debtor found that this debtor continued to trade with another company operated by the director, which provided similar services. Our investigations identified this company was incorporated two days after the winding up application was filed. Putting aside illegal phoenix considerations, the director clearly instructed the debtor to pay the funds to himself or the other company. This resulted in a claim against the director.

We issued a demand to the director to repay the misappropriated funds and despite admitting to improper misuse, the funds were not repaid and the director ceased communicating with us.

The director’s actions clearly were not in creditors’ best interests, he attempted to conceal assets from the liquidator, he provided false information to the liquidator and he used information for his own benefit. Under our obligations, we considered the following director duty breaches under the Corporations Act 2001:

• Section 180 – Care and diligence;

• Section 181 – Good faith;

• Section 182 – Use of position;

• Section 183 – Use of information;

• Section 184 – Good faith, use of position and use of information; and

• Section 590 – Offences by officers of certain companies.

We reported the director’s breaches to ASIC under section 533(1) of the Corporations Act and a supplementary report was submitted following a subsequent ASIC request (section 533(2) of the Act).

After considering our report and documentary evidence, ASIC referred the matter to the DPP to consider prosecuting the director. Shortly after the DPP commenced its action, the director proposed to repay the funds and we thereafter received the funds in full. These funds will allow for a dividend to be paid to the company’s creditors. The DPP’s prosecution is ongoing, and the director has yet to be sentenced.

This liquidation is an example of how ASIC’s assistance along with the DPP can result in recoveries even when a director avoids communications with the liquidator, proving that it’s in the best interests of debtors and directors alike to be honest and do the right thing by creditors. If we detect wrongdoing, it’s our obligation to try and right those wrongs through reporting to the regulators and other practical and commercial channels.