Failing to notify directors returns to bite

It must be some relief to liquidators to know that they can overlook notifying an insolvent company’s directors about applying to extend the three-year legal deadline to bring preference actions and there’s no blowback. Well, not for the liquidators at least.

“The plaintiffs concede the directors should have been notified of the original application. They accept it was an oversight on their part and they accept the directors had the right to be heard.” Master Craig Sanderson.

For the directors of failed West Australian-based civil construction outfit Brierty Limited however, the decision delivered this week in Matthew David Woods as joint and several liquidator of Brierty Limited (ACN 095 459 448) (In Liquidation) [2022] WASC 310 provides little comfort.

Whilst the directors have been granted a chance to be heard at a rehearing of the original ex-parte leave-to-extend application KPMG partner Woods and colleagues Hayden White and Clint Joseph brought in mid-2020, their overriding concern hinges on whether the liquidators succeed in their pursuit of $5.57 million Brierty paid to the Australian Taxation Office (ATO) in 2017, only months before the KPMG trio were appointed as administrators.

This is because if the ATO has to pay back the $5.57 million to Woods, White and Joseph, it could well seek indemnification for that amount from Brierty’s directors.

Master Craig Sanderson agreed that the original application for leave to extend should be reheard and that the directors should have been advised in the first instance.

“The plaintiffs concede the directors should have been notified of the original application,” he said.

“They accept it was an oversight on their part and they accept the directors had the right to be heard.”

The judge also alluded to the risk the directors face should the liquidators’ preference case succeed.

” …. if payments to the Commissioner of Taxation are set aside as preferences then the Commissioner can recover those amounts from the directors pursuant to s 588FGA(2) of the Act,” he said.

“So any liability of the directors is dependant upon the Commissioner taking action against them.

“In the normal course, if the Commissioner has determined either that there is no defence to the plaintiff’s claim or there is a real prospect the claim will succeed then the directors will be joined to the proceedings.

“In fact, it is not uncommon for the directors to have conduct of the defence – effectively standing in the shoes of the Commissioner.

“In this case, it does not appear as though the Commissioner has made a decision as to whether the directors should be joined and an indemnity is sought from them. Be that as it may, it is clear the directors have an interest in being heard in any application for an extension of time,” the judge said.

Very clear. The directors wrote to the liquidators in 2018 saying they would defend any proceedings so to discover that leave to extend had been granted by the courts in 2020 without them being given an opportunity to be heard, and likely oppose, must have been a nasty surprise.

And now the directors must wait for some considerable period before knowing whether or not they will be on the hook for the more than $5 million they presumably authorised be paid to the ATO. Thank god the liquidators can rest easy.