Background: what lead to this outcome?
Prior to its collapse, Kleenmaid provided retail whitegoods to customers Australia-wide. Deloitte were appointed as voluntary administrators in April 2009 and liquidators a few months later and, at the time of writing, its website notes that the Kleenmaid group has over $102 million in liabilities.
Reports issued to creditors during the administration and liquidation tell a story of missing records, questionable transactions, minimal cash flow and unrecoverable inter-company loans, leading to a devastating “little chance of dividend” outcome for creditors.
What is abundantly evident some seven years on is that the Kleenmaid group was suffering for a long time before its ultimate demise and, given the palpable ways in which this manifested, the directors ought to have known about it.
An important part of Kleenmaid’s final moments, and a key component of the case against the directors, was the provision of a multi-million dollar loan by Westpac. This loan was provided at a time when Kleenmaid was hopelessly insolvent (a fact masked by an intra-group restructure and various inter-company loans) and, as was alleged in the criminal trial, at a time when the directors must have known that Kleenmaid had limited means to repay the money borrowed.
The duty: what should the directors have done to avoid this?
The duty to prevent insolvent trading sits within s588G of the Corporations Act. It imposes on directors a duty to prevent a company from incurring a debt when:
- the company is insolvent, or
- there are reasonable grounds to consider the company is likely to become insolvent by incurring the debt.
- can be ordered to compensate the company for any loss suffered
- may be liable for a pecuniary penalty up to $200,000, and
- can be disqualified from managing a corporation.
- a penalty of up to 2,000 penalty units (currently amounting to $243,800), or
Having regard to the grave factual circumstances, it came as no surprise when the Commonwealth Director of Public Prosecutions, on behalf of ASIC, commenced criminal proceedings against the directors in 2012.
Following the imposition of the charges, one of the directors, Gary Armstrong, pleaded guilty to one count of dishonestly gaining loan facilities from Westpac in 2007 and two counts of insolvent trading. Armstrong was subsequently sentenced to seven years in prison and is eligible for parole in February 2018.
Notwithstanding Armstrong’s capitulation, fellow directors Bradley and Andrew Young vehemently denied the charges filed against them. Both were charged with one count of fraud and 18 counts of insolvent trading.
Relying on evidence obtained by the liquidators in their investigations, including a public examination of the directors, the prosecution argued that the directors knew of the company’s financial instability and egregious debt position but did not disclose this information to Westpac when applying for the loan.
After nine days of the eventual 71 day trial, the trial against Andrew Young was adjourned to allow him to find another barrister to represent him. His trial will continue another day.
When the trial against Bradley Young continued, his lawyer tendered over 60 character references with respect to his client. Unfortunately, that was of no avail as the jury found Mr Young guilty of the fraud charge as well as 17 of the 18 charges of insolvent trading.
When delivering his sentence, District Court Judge Farr commented on what he considered to be Mr Young’s ‘callous disregard’ for those who would ultimately be affected by his actions. His Honour sentenced Young to nine years in jail; he is eligible for parole after six years and three months.
A trial date for the third director and brother to Brad, Andrew Young, is yet to be set.
McCullough Robertson has been the primary legal advisors to the liquidators since 2009.