Fraud on creditors

Fraud on creditors happens more than you think. Sometimes it can be quite subtle; while at others it’s completely overt.

Regardless of its form, its substance is to deprive creditors of their due entitlement and to prefer one party ahead of the rest. There are a number of ways in which these transactions can be upset.

Key to taking action is the appointment of a Liquidator. The Companies Act 1993 gives Liquidators significant powers to investigate and recover from dishonest shareholders and directors.

Criminal charges may also follow where the actions are shown to breach the Crimes Act 1961.

Where creditors are not prepared to fund the liquidator to take a stand, the shareholder/director will usually get away with the fraud.

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HOW THE FRAUDS OCCUR


Common examples are:

A director of a company paying creditors whose accounts he has personally guaranteed ahead of their entitlement and ahead of the rest of the creditor pool.


A director repaying his personal, unsecured debt to himself and then a short time later re-advancing that money back to the company under a secured arrangement, thereby changing the liability from the company’s perspective, from an account that would be paid last, to one which gets paid first.


A shareholder/director incurring the costs of establishing a profitable contract in company “A”, not paying the creditors’ associated with that contract, instead letting that company go into liquidation, but not before transferring the contract to his company “B” which receives the cashflow and profit from the contract.


A shareholder/director assigning the intellectual property of company “A” to company “B”, purportedly to guarantee payment of a debt; defaulting on the payment and costing company “A” the Intellectual property. Company “A” goes into liquidation and the shareholder/director goes to “work” for company “B”.

 

A director sells assets of a company in financial difficulties to a friendly third party for a value significantly less than the value of the assets on the open market.

 

In almost all cases exampled above, company “A” will be out of cash. Therefore the liquidator will need funding from creditors to attack the bogus transactions and make any recoveries.

Many creditors are not prepared to put their hands in their pockets tand take the chance that the Liquidator may not be successful. However if no action is taken, the creditors remain the losers.  If the Liquidator is successful,  out of the funds recovered, the contributions by creditors to the recovery action (but not their claims)  are paid before any distribution to creditors generally.