Navigating Company Restructuring: Restructuring of Companies by Specialist Advisers and its Associated Risks
The Federal Court decision of Connelly (liquidator) v Papadopoulos, in the matter of TSK QLD Pty Ltd (in liq) [2024] FCA 888 highlights the serious implications for directors and officers of companies and qualified professional advisers involved in restructuring of companies. The case involved TSK QLD Pty Ltd (in liquidation) ACN 605 921 506 (TSK), a company undergoing financial distress, which brought to light complex legal considerations that companies must navigate during restructuring, including the restricting of companies later to be found as an asset-stripping scheme.
Background
TSK carried on business providing recruitment and labour hire services to customers in the energy industries. TSK had a significant turnover in the 2019 and 2020 financial years, being $90 million and $84 million respectively.
By late February 2021, TSK was undergoing financial distress. As a result, TSK entered voluntary administration, and shortly after, the creditors of TSK resolved that the company be wound up.
In 2021, TSK was subject to an asset-stripping scheme by an external accountant adviser, Ben Whitehouse (Whitehouse) who held himself out to be a specialist in restructuring. During this time, approximately $10.3 million was withdrawn from TSK’s account and paid to a director, senior management of TSK, and along with payments to Whitehouse and their corporate entities.
The moneys were paid pursuant to:
a sale agreement whereby TSK purportedly sold its business to an entity controlled by TSK’s CEO; and
a debt collection scheme whereby TSK allegedly appointed entities associated with Whitehouse to collect TSK’s debts, valuing TSK’s assets at nil.
As a result of the scheme, the plaintiffs (liquidators of TSK) argued that TSK suffered loss and damage in the amount of $8,852,814.09
Whitehouse and his corporate entities were the only defendants who appeared at the trial (Whitehouse Defendants).
Issues
The issues which remained in dispute between the parties who appeared at the trial were:
the liability of the Whitehouse Defendants for the payments totalling to approximately $2 million dollars;
the value of employee entitlements assumed by Torquejobs (see below description of Torquejobs); and
the impact of the Torquejobs settlement deed upon the form of orders to be made against the Whitehouse Defendants.
Judgment
Whitehouse Defendants Liability
In late October to early November 2021, TSK made multiple payments totalling $2.016 million to Torquejobs Pty Ltd ACN 648 846 520 (Torquejobs), an entity controlled by TSK’s CEO and one of the corporate entities involved in the restructuring activities.
The Whitehouse Defendants argued that Whitehouse had no direct involvement with these transactions, instead arguing that the internal accounting team at Torquejobs were responsible for the movement of money between TSK’s and the bank accounts for Torquejobs.
The court ruled that Whitehouse’s knowledge of all essential aspects of the scheme’s design, as evidenced in a diagram he created, was sufficient to establish a breach of fiduciary duty. Therefore, regardless of Whitehouse’s direct involvement in the specific transactions, the design of the scheme itself constituted a breach of fiduciary duty.
Employee Entitlements
Another pivotal aspect was the valuation of employee entitlements, specifically long service and sick leave. The court accepted an independent expert's assessment that recorded nil values for these entitlements, underscoring the need for accurate financial statements and due diligence when assuming liabilities during restructuring.
Torquejobs Settlement Deed
The Whitehouse Defendants adviser sought a novel order whereby payments of the judgment sum would only be required in event of default by other parties with whom the liquidators had reached settlement.
The Court did not make the orders sought by the Whitehouse Defendants on the basis that:
The liquidators should not be denied the opportunity of immediate recovery from the Whitehouse Defendants; and
The orders sought are premised on the Court exercising its power pursuant to rr 41.03 and 41.11 of the Federal Court Rules 2011 (Cth) to temporarily stay its orders, or execution of them, to avoid “irremediable harm” or “serious injury” to a party. However, there was no evidence to support a submission that enforcement of a judgment against the Whitehouse Defendants would cause “irremediable harm” or “serious injury”.
Key Takeaways:
Directors or officers of a company involved in restructuring activity can be held liable for breaches of fiduciary duty implementing a scheme provided by a qualified professional adviser. Therefore, it is important that directors and officers understand their duties and responsibilities to the company and its creditors.
Qualified professional advisers involved in restructuring activity can be held liable for breaches of fiduciary duties for creating a scheme and its implementation even in circumstances where they are not directly involved in the transactions to give effect to the devised scheme. It is important that qualified professional advisers understand the lawful means of engaging in the restructuring of companies, in particular, their duties and responsibilities as a qualified professional adviser.
Companies must conduct thorough due diligence when assuming employee entitlements or other liabilities. Failing to accurately assess these can lead to significant financial exposure.
Restructuring often involves significant changes to operations, which can lead to disruptions if not managed effectively. Companies should plan for a smooth transition to mitigate operational risks.
Seeking legal, accounting and financial advice prior to effecting restructuring can provide essential guidance and help protect your company’s interests in complex restructuring situations. If you would like to discuss a potential restructure of your business, please contact:
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal
Jemimah Fitzgerald
Lawyer
T 03 5225 5219
E jfitzgerald@ha.legal
