Shadow director faces search warrant after fobbing off liquidator requests - Insolvency/Bankruptcy

In the recent decision of Banerjee (Liquidator), in the matter of Eastside Formwork Pty Ltd (in liq) v Stojic [2022] FCA 1315, a liquidator succeeded in obtaining orders for a warrant to search for and seize books and records which had been concealed from the liquidator. The warrant was directed at the person deemed the 'guiding mind and will' of the company in liquidation, who had repeatedly 'fobbed off' requests for the production of all records of the company.

Key takeaways

Courts will look to whether there has been a persistent pattern of non-cooperation and evasion when issuing a warrant for search and seizure.
Liquidators should consider taking steps to compel production where blatantly incomplete records indicate the existence of further records required for production.
Failing to make a meaningful attempt to assist liquidators in their requests will not be taken kindly by the courts.

The Federal Court recently handed down its decision in Banerjee (Liquidator), in the matter of Eastside Formwork Pty Ltd (in liq) v Stojic[2022] FCA 1315. The Court authorised Eastside Formwork Pty Ltd's liquidator (the Liquidator) to search for and seize all books and records of the company in liquidation from the second defendant, Mr Stojic.

The Court had to be satisfied that it was appropriate to issue a warrant for search and seizure under section 530C(2) of the Corporations Act 2001 (Cth) (Act). This required consideration as to whether Mr Stojic had concealed or removed property of Eastside Formwork Pty Ltd (the Company) such that the Liquidator was prevented from or delayed in taking custody of that property.

In this case, the Court accepted the Liquidator's argument that Mr Stojic had attempted to 'fob off' requests for access to the Company's books and records. Justice Halley was satisfied that this evidenced a "persistent pattern of non-cooperation and evasion" such as to justify the warrant sought.

Background and underlying proceeding

The application for a warrant of search and seizure was brought by the Liquidator of Eastside Formwork Pty Ltd (In Liquidation). The Company was ostensibly run by the third defendant, Mr Zaidan, who had been its sole director and secretary. The Liquidator, however, considered Mr Zaidan to be a 'straw director' who primarily took instructions from the second defendant, Mr Stojic.

Mrs Stojic, Mr Stojic's wife, was the sole director of Eastside Holdings and Buildquip, which had both allegedly received cash from the Company prior to it being placed in liquidation and were thought to be part of a larger scheme being run by the Company.

In October 2020, the Liquidator (then administrator) had issued notices requiring Mr Stojic and Mr Zaidan to produce all books and records of the Company in their possession. In response, Mr Stojic had claimed that receivers, then appointed to the Company, had possession of the relevant documents.

The Liquidator later issued notices to Mrs Stojic in her capacity as director of Buildquip, to deliver all books and records of the Company in her possession. Solicitors for Mrs Stojic also claimed that the requests could not be satisfied.

Proceedings were brought by the Liquidator against Mr Zaidan, Mr Stojic and Mrs Stojic in March 2021, alleging that all three parties had breached statutory duties under the Act and that payments made by the Company to Eastside Holdings, Buildquip and Mr Stojic were voidable transactions under section 588FE of the Act, on the basis that they were related-party transactions, creditor-defeating transactions or, in respect of Mr Stojic, that he failed to prevent insolvent trading.

Liquidator seeks warrant

Following an application from the Liquidator to amend his Statement of Claim in the proceeding, Mrs Stojic filed an affidavit in September 2022 exhibiting a number of documents which contained emails sent to or from the Company's email server. These emails had not been produced by any of the parties in response to the original notices.

After the Liquidator wrote to Mr Stojic and Mrs Stojic seeking production of all emails forming part of the records of the Company, Mrs Stojic's lawyers claimed that their client did not have access to the email server of the Company.

The Liquidator sought a warrant under section 530C of the Act for search and seizure of all books and records of the Company, having been put on notice that the original production of documentation by Mr Stojic and Mrs Stojic was not comprehensive.

Orders

The Court ordered the District Registrar to issue the warrant sought under section 530C of the Act, directed at Mr Stojic as the second defendant. The Court was satisfied that Mr Stojic had concealed books and records of the Company on certain premises, and authorised the Liquidator to enter the premises to search for and seize those records.

The Court also issued suppression orders and filing requirements to ensure the warrant could be executed without notice to the defendants.

Reasoning of the Court

The Court followed existing authority that a "persistent pattern of non-cooperation and evasion" should justify the granting of a warrant.

The Court began by accepting Mr Stojic as the 'guiding mind and will' of the Company to justify directing the warrant at him. Attention then turned on Mr Stojic's persistent failure to produce the documents requested in the notices he received. His claim that all books and records were provided to the receiver was deemed "implausible".

The confirmation that there were extra documents to be produced, evidenced by Mrs Stojic's affidavit and the exhibited emails, further justified the orders.

Comment

Notices issued by liquidators for the production of books and records need to be complied with properly, without concealing or removing documentation which is inconvenient or revealing. Failing to do so may persuade a court that it is appropriate to take further, more intrusive action in the form of a warrant for search and seizure.

Communications between liquidators and those persons subject to notices (as well as their solicitors) may serve as evidence of a pattern of cooperation or non-cooperation.

This decision is a timely reminder to insolvency practitioners of the avenues available to overcome non-cooperation by directors and others involved in the management of a company and the thresholds to be met in such cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.