Recent Court rulings in Queensland may be the beginning of a paradigm shift by the legislature in favor of liquidators’ recovery powers. The learned judges morphed an uncommercial transaction into a preferential transaction and in separate proceedings found the defendant to be a de facto director and therefore liable for insolvent trading.
The starting point in the discussion is the matter of Ashala Model Agency Pty Ltd (in liq) & Anor v Featherstone & Anor  QSC 121.
The liquidator of Ashala Model Agency Pty Ltd (the Company) commenced proceedings against the Company’s shadow director, Mr Featherstone. The liquidator argued that Mr. Featherstone, whilst effectively in control of the Company, used Company funds to repay himself a loan he had previously made to the Company. Mr Featherstone subsequently used those funds to purchase a residential property for his de facto partner, Ms Marks. Ms Marks was also the major shareholder of the Company.
The Liquidator argued that the repayment of the loan rendered the company insolvent and that the payment constituted an uncommercil transaction and therefore recoverable by the liquidator under the Act.
Mr Featherstone, in summary, argued that the repayment of the loan was not uncommercial as the Company effectively received a benefit from the reduction of the debt it owed him.
Unsurprisingly, the Court held that the transaction did not constitute a conventional style of uncommercial transaction, by concluding that the transaction was not a transaction at undervalue, being one of the most common instances of an uncommercial transaction, having determined that in effect the transaction did neither improve or detract from the Company’s financial position.
The liquidator could have been no doubted “knocked over by a feather” when the learned judges, leaving no stone unturned, expanded their deliberations to consider whether an uncommercial transaction could be a preferential transaction, even though the liquidator had not promoted the argument that the transaction could be considered preferential.
The Judges, in essence, did all the hard mental lifting for the Liquidator, concluding in a 2 to 1 verdict that the transaction was an unfair preference, and therefore it was also an uncommercial transaction. As such, the transaction was voidable and ordered that the property purchased with the monies be transferred to the Company.
Prior to the above matter, the liquidator had commenced action (see Featherstone v DJ Hambleton as Liquidator of Ashala Pty Ltd (In Liq)  QCA 43) against Mr Featherstone in the District Court claiming Mr Featherstone was at the relevant times a de facto director of the company and at those times had failed to prevent insolvent trading and therefore should compensate creditors for their losses.
The issue of de facto or shadow directors is always topical but likely to become of more interest soon with the introduction of the Safe Harbour regime into the Act. I expect any adviser intending to assist company Directors navigate and implement rescue plans when the regime becomes law, will want to be fully aware of the fine line between consultant and shadow director!
Interestingly in this matter, Mr Featherstone was in the possession of a duly executed agreement clearly stating that he had no control, powers or rights regarding the Company’s affairs or operations, and he was employed as the Company’s training and events co-coordinator.
The Liquidator provided the primary judge with sufficient evidence for the judge to find it was Featherstone “who pulled the strings” in relation to the Company’s trading activities as well as undertaking activities in relation to the Company’s affairs typical of a director.
Mr Featherstone appealed. The Court of Appeal upheld the District Court Judge’s findings, pointing towards the evidence that Mr Featherstone (by his own admission in some instances):-
- Was involved with day to day decision making of the Company from time to time;
- Most major decisions being made by the Company, if Featherstone was not directly involved, required his consent;
- Despite having transferred his shareholding to Ms Marks, it was determined that the shares were in fact held on trust for Featherstone, allowing him to control Ms Marks, despite Ms Marks being the sole director.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.