What's the latest on…liquidators' search warrants?

This is the first in a series of articles looking at practical aspects of insolvency appointments in Australia and the tools available to assist insolvency practitioners with their investigations and recovery actions.

Under s. 530C of the Corporations Act 2001 (Act), a court may issue a warrant, on the application of a liquidator, if it is satisfied that a person:

• has concealed or removed property of the company with the result that the taking of the property into the custody or control of the liquidator will be prevented or delayed; or
• has concealed, destroyed or removed books of the company or is about to do so.

The warrant may authorise the liquidator or their agent to:

• search for and seize property or books of the company in the possession of the person; and
• deliver, as specified in the warrant, the property or books seized under it.

The liquidator or their agent obtains the power to break open a building, room or receptacle in order to execute the warrant. The warrant can be sought on an ex parte basis and confidentiality orders can be included in relation to the application documents. A warrant is a powerful but invasive tool in a liquidator's kitbag.

Recently, in Naidenov (liquidator) v Davey, in the matter of Josa Civil Group Pty Ltd (in liq) [2021] FCA 1175, the liquidator sought a warrant to search for and seize books and records of the company and other property, specifically motor vehicles.

The liquidator had issued notices under s. 530A of the Act requiring the production of company records, and numerous follow-up letters, to the sole director appointed shortly before the liquidator's appointment and to the sole director (and shareholder) she replaced. Various tax invoices and payment confirmations only were eventually produced by the former director. The other shareholder, after some delay, produced a few documents to the liquidator. Those included 38 pages of spreadsheets with generic descriptions of the transactions of the company such as: "Funds transferred from another/separate account to pay invoice". It was clear to the Court, however, that other books and records of the company had been used to prepare those spreadsheets.

The liquidator had also identified 17 vehicles previously registered to the company (including a Ferrari, a Mercedes, Harley Davidson motorcycles and 4WD utes) but there were no records of their transfer to new owners, no consideration paid to the company for the vehicles and none were subject to finance. Neither the current or former director, nor the other shareholder, were able to disclose the location of any of the company's vehicles, despite multiple requests for information from the liquidator.

The Court adopted previous decisions in which s. 530C was described as "a remedy of last resort" but one to be used where there has been a "persistent pattern of non-cooperation and evasion". In granting the warrant, the Court was satisfied of that persistent pattern by the evidence of the unexplained failures to comply with the liquidator's requests for books and records, and the whereabouts of the vehicles. The Court noted as well the company's non-compliance with its obligations to the Australian Taxation Office (ATO) over many years. The liquidator had also presented evidence from the company's bookkeeper that the books and records of the company had been returned to the other shareholder.

The liquidator also sought an order under s. 597A of the Act for each of the current and former directors, and the other shareholder, to provide an affidavit as to the current whereabouts or last known location of vehicles that were not able to be seized by the liquidator under the search warrant. The Court granted that order as well.

There is a strong hint in the case of underlying illegal phoenix activity with the company in question - unreported and unmet taxation obligations; significant other debts; the transfer and disappearance of company assets; the resignation of the director shortly before an insolvency appointment; the appointment of a "straw-person" director who is not able to assist the liquidator with their investigations; and evidence that other books and records must exist to explain the company's transactions.

A search warrant is a powerful tool for a liquidator to hold, particularly with the expected insolvencies that will arise as Australia emerges from the COVID-19 pandemic and associated lockdowns. A lot of phoenix-like activity is likely to have been undertaken while insolvency stakeholders like the ATO, Australian Securities and Investments Commission (ASIC), banks and other financiers have been rightly occupied by other impacts of the pandemic. Liquidators may have to increasingly utilise the power to seek search warrants to assist them to sift through, and gather, the ashes left behind by illegal phoenix activity.

Author: Keiran Breckenridge, Special Counsel.

Lander & Rogers' Commercial Disputes group acts on insolvency and restructuring matters for the full range of stakeholders impacted by financial distress - creditors and debtors, directors and shareholders, financiers and, of course, the insolvency practitioners who are brought in to bring order to, and resolve, such difficult circumstances.