I’m owed money and the director is transferring assets and paying his mates

The process for a creditor to appoint a liquidator to a company takes a few months at minimum.

While this process is occurring, the director of the company remains in control of the company and can take steps to dissipate (transfer) the assets of the company, pay certain creditors ahead of others, or fire-sell assets to continue trading.

Let’s look at the process of putting a company into liquidation in very basic detail before considering what to do about the director and his mates.

1.1 Statutory demand

Firstly, a creditor must serve a statutory demand on the company which owes the money. A statutory demand is a legal notice which a creditor needs to serve on a company in the prescribed manner:

1. There must be no arguable dispute or reason or the amount owing
2. If the creditor disputes the amount owing, he needs to prepare and serve an application to have the statutory demand set aside within ten working days
3. If no application to set aside the statutory demand is made, the creditor must pay within 15 working days of service of the statutory demand.

In the event that 15 working days passes and payment has not been received the creditor can then file an application to place the company into liquidation.

1.2 Liquidation application

Upon expiration of the statutory demand, the creditor will file a statement of claim in the high court seeking an order that the company which owes money be placed into liquidation.

The time period between filing the statement of claim and the company being placed into liquidation can vary, but usually takes two to three months. Liquidation applications can be adjourned and delayed for a variety of reasons, which creates a significant amount of delay.

Now that we are clear as to why the process takes so long, let’s consider the options avaiable to deal with the director who is dishing out payments and selling off assets:

2.0 Possible remedies

There can be a many delays between when a company incurs a debt (invoices) and when the company is finally placed into liquidation, with the liquidation application being just one of them. To counter this delay and often happens in this period the following four courses of action can be taken:

• Interim liquidation
• Voidable disposition
• Voidable transactions
• Transaction undervalue / inadequate consideration

Below is a brief overview of the processes and how they apply.

2.1 Interim liquidation

If there is evidence that a director is intending to, or actively dissipating assets or otherwise destroying the value of a company in advance of a full liquidation hearing a creditor can apply to court for an interim liquidator to be appointed. Examples include:

• A director is diverting customer payments to related entities
• A director is transferring key assets to related entities or selling them

An interim liquidation is a measure where the court appoints a licensed insolvency practitioner to preserve the asset position of the company and prepare a report to court in advance of the final liquidation application.

The advantages of an interim liquidation is that it is a quick measure which allows for a third-party to manage and control the affairs and assets of the company before a full liquidation hearing can occur.

2.2 Voidable disposition

Introduced in September 2020, voidable dispositions are a relatively new tool for liquidators.

A voidable disposition allows liquidators to reverse ‘disposition’ not made in the ordinary course of business during the period between a liquidation application is filed at the High Court, and the appointment of a liquidator is made.

A ‘disposition’ includes making a cash payment to someone, transfer of property or the creation of a trust (among other remedies).

The court can make orders that the property be returned to the company, or that the company pay a money amount equal to the property transferred.

Case study example:

• An application to place Oldco Limited is made on 1 January 2025
• The director of Oldco Limited transfers motor vehicles worth $100,000 to his brother’s company Newco Limited on 1 February 2025
• On 1 March 2025 Oldco Limited is placed into liquidation by order of the High Court.

The above transfer to Newco is potentially subject to the voidable disposition regime, the liquidators could make an order that the motor vehicles be returned to the company in liquidation.

2.3 Voidable transactions

Sometimes directors of may conduct a semi orderly cessation of business of the company while creditors are petitioning to liquidate the company.

Unfortunately, sometimes creditors may prioritise the payment of certain creditors over others, this could be because they have a personal guarantee and or have a good relationship with the supplier, and may want to deal with them in a new company.

The voidable transaction regime allows liquidators to recover payments made directly to creditors within six months of a liquidation application being filed (for third parties) and two years (for related parties).

There are specific criteria for setting aside voidable transactions which we won’t get into here. Below is a common example of such an instance:

1. As at 1 March 2025, Building Co Limited is insolvent and has the following  long outstanding debts:
   1. Plasterboard supply co: $100,000
   1. Electrical Contractors ltd: $100,000
   1. A loan from the director’s trust of $50,000
2. The director of Building Co Limited has personally guaranteed Plasterboard supply co’s debt of $100,000
3. On 1 April 2025 Electrical Contractors files an application to place Building Co Limited into liquidation
4. On 31 May 2025, a customer of Building co Limited, pays 150,000; Building co Limited pays Plasterboard supply co $100,000 and $50,000 to the directors trust
5. Once the payment is made, Building Co ceases trading and is eventually placed into liquidation in June 2025

In the above scenario, both the payment of $100,000 to Plasterboard supply co and the payment of $50,000 to the trust are potentially voidable. This means we would potentially be able to recover $100,000 from Plasterboard and $50,000 from the trust and use these funds to distribute to creditors.

2.4 Transaction undervalue (Section 297)

Sometimes a director may sell assets of the company at bargain prices to pay key suppliers or staff, if these are sold cheaply, we can sometimes recover funds from the purchasers:

Section 297 of the Companies Act allows for recoveries against third parties who purchase assets from an insolvent company at undervalue provided certain criteria is met.

To provide an example:

Publishing Co Limited is insolvent, and has payroll of $40,000 due on Friday.

In order to raise funds to pay the wages, the director places an ad to sell two motor vehicles owned by Publishing Co Limited Facebook market place:

“URGENT NEED SALE NOW”

Publishing Co sells two motor vehicles for $50,000 which are worth $100,000 to ABC Limited.

Publishing Co Limited is subsequently placed into liquidation two weeks later.

Under the above scenario, despite the fact the sale was entered into with good intentions (to make payroll) we would have a potential claim for $50,000 against ABC Limited, representing the difference between the value of the vehicles ($100,000) and the purchase price received, $50,000.