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Court finds statutory duties breached by de facto director – Insolvency/Bankruptcy

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This week’s TGIF examines a recent NSW Supreme Court
decision that illustrates the circumstances in which a person will
be regarded as a ‘de facto director’ and the duties owed to
creditors when facing insolvency.

Key takeaways

  • Whether a person is a ‘de facto director’ is a question
    of fact and requires consideration of the powers exercised by that
    person and the perception of third parties who deal with the

  • The duties of a director to act in good faith and for proper
    purpose may, in times of financial stress, extend to taking into
    account the interests of a company’s creditors.

  • A failure to respond to notices for production and engage in
    public examinations may risk adverse inferences being drawn in
    later proceedings on such matters.

What happened?

Hemisphere Technologies Pty Ltd (the Company)
was in the business of distributing antivirus and cyber security
software. A distribution agreement with Kaspersky Lab UK Ltd
(Kaspersky) accounted for a significant part of
the Company’s revenue.

On 25 August 2016, Kaspersky terminated the agreement due to
unpaid royalties claimed to be owing under the distribution
agreement and later commenced proceedings to recover the debt owed
to it. On 22 December 2016, the Company sold its trade debtors and
stock to Hemisphere Technologies AUS Pty Ltd and appointed
liquidators on 17 January 2017.

On 29 June 2018, the Supreme Court of NSW appointed a special
purpose liquidator (SPL) to investigate whether
the director of the Company had breached his duties and, if so,
pursuing any claim that may be available.

Following public examinations pursuant to Part 5.9 of the
Corporations Act 2001 (Cth) (the Act),
the SPL commenced proceedings against the former director of the
Company and contended, despite a resignation dated 14 October 2014,
that he remained a director until the winding up of the Company in

Two corporate entities were also added as defendants to the
claim and orders sought against them for alleged unreasonable
director-related transactions.

The Evidence

The evidence adduced at the hearing revealed that:

  • the director had authorised the Company to make payments as a
    deposit for a property to be purchased by two separate entities of
    which he was also a director and beneficiary under the relevant
    trusts; and

  • payments totalling $1.7 million had been made by the Company to
    companies of which the director was also a director and
    shareholder, in circumstances where the Company had ceased
    operating, was defending the proceedings by Kaspersky and owed a
    substantial debt to the ATO.

No documents were produced in earlier public examinations to
explain the use of the Company’s funds for such purposes and
the SPL tendered transcripts of those examinations in which the
director failed to provide a persuasive explanation to support the


The Court ultimately concluded that the director had continued
to act as director from his ‘resignation’ until the date of
the Company’s winding up and, subsequent to that finding, that
his statutory duties had been breached and that the payments made
in the months preceding the liquidation were voidable.

In reaching this decision, her Honour observed that:

  • the director’s conduct, together with admissions in his
    examination, supported a conclusion that he met the definition of
    ‘director’ in the Act (despite his earlier resignation).
    That conduct included signing resolutions as a director, executing
    a lease as a director and deposing as such in an affidavit in the
    Kaspersky proceedings. In light of this, her Honour concluded that
    he acted as a ‘de facto’ director during the relevant

  • given the Company’s financial circumstances, the
    director’s statutory duties included an obligation to take into
    account the interests of creditors. Her Honour found that, on the
    evidence, the $1.7 million appeared to have been paid to entities
    who provided no services to the Company and to which the Company
    had no pre-existing liability. Moreover, her Honour noted the
    vague, speculative answers the director gave during his public
    examination and inferred that no indebtedness of the Company was
    required to be discharged; and

  • there was no evidence that the Company benefitted, either
    directly or indirectly, from the payments made as deposit for a
    property. Her Honour determined that the funds benefitted the
    recipients of the monies who acquired the properties (of which the
    director was also director and beneficiary of the underlying
    trusts) and the requirements for an unreasonable director-related
    transaction were satisfied.

As a consequence of the findings above, orders were made which
required the payment of compensation by the director to the Company
of $1.7 million and for the deposit amount to be repaid by the


This case serves as a useful reminder to insolvency
practitioners and their advisers of the potential for claims
against persons who, although no longer recorded as a director,
discharge the duties attaching to the office. If the evidentiary
threshold can be satisfied, claims for relief for breach of duty
can be available.

The decision also demonstrates the risks of failing to respond
to orders for production and meaningfully engage with questions
under public examination. Such actions may lead to adverse
inferences being drawn in subsequent proceedings on matters that
may have a cogent explanation.

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.

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