Although making search and seizure orders are seen as orders of last resort, a recent case demonstrates that Courts are willing to make these orders in light of persistent non-co-operation and evasion. The decision in Naidenov (liquidator) v Davey, in the matter of Josa Civil Group Pty Ltd (in liq) [2021] FCA 1175 (Josa Civil Group) provides a useful roadmap for getting Court assistance for liquidators who are facing difficulties obtaining books and records from directors.
Josa goes into liquidation, and the books go into hiding
Josa Civil Group Pty Ltd (Company) operated as part of a group of related companies that carried out construction works and, along with related companies, was wound up in insolvency when a liquidator was appointed on 5 May 2020. The books and records of the Company revealed that the company had creditors totalling $136,000 but following further investigations by the liquidator, Steven Naidenov, it was estimated that the quantum of creditors was likely approximately $5.4m.
Following the investigations by the liquidator as to potential causes of action against the Company, including the existence of a scheme to defraud the ATO, and illegal pheonixing activity by the Company (and by companies within the broader corporate group), the liquidator applied by way of an ex parte application to the Court to obtain more information as to the state of the Company's assets and liabilities, which sought:
- search and seizure warrants for the Company's vehicles and books, that he believed to have been concealed or destroyed, pursuant to section 530C of the Corporations Act 2001 (Cth); and
- an affidavit by each of the defendants (each being a director of the Company at relevant times) which specified the location of the Company's vehicles, details regarding any sale of the vehicles and other information ascertaining the status of any vehicles owned by the Company, via section 597A of the Act.
The first defendant to the application was the Company’s sole director at the time of the winding up of the Company, and the second and third defendants were each 50% shareholders in the Company and directors of related companies.
Search and seizure warrants: the law
A 'search and seizure warrant' is a Court order allowing for a liquidator to search for and seize specified property or books of a company. The general position, which the Court approved in Josa Civil Group, is to the effect that obtaining search and seizure warrants from a Court is commonly known as "a remedy of last resort". It is a somewhat underused power because the Court will not usually issue such a warrant unless all other reasonable steps have been taken and thus it is necessary to take an "extreme" step, such as a warrant, to administer the company. Other steps ordinarily expected of a liquidator before seeking remedies pursuant to section 530C include:
- issuing letters and notices under section 530A of the Act to compel officers of a company to give up the books and records, or inform the liquidator of their whereabouts. This section also includes other broad obligations which require the officers to attend meetings, give information and do what is required to help the liquidator wind up the company; and
- action pursuant to section 530B, whereby a liquidator may give a written notice requiring a person to deliver the books in their possession. The person to whom the notice is addressed then has three days to respond.
In Josa Civil Group, the Court confirmed that the usual approach to search and seizure warrants is that the following must be satisfied to make an order:
- the company is being wound up;
- the application is made by a liquidator; and
- the Court must be satisfied that the person has:
- concealed or removed property of the company, with the result that the taking of the property into the custody or control of the liquidator will be prevented or delayed; or
- concealed, destroyed or removed books of the company or is about to do so.
The Court held that the following non-exhaustive matters can be relied on to establish the relevant concealment:
- refusals to comply with liquidators’ requests to deliver up books;
- transfer of assets to related companies without proper account; and
- moving of assets, books or records to another place.
Crucially, the authorities establish there must be a persistent pattern of non-co-operation with the liquidator's requests.
Establishing a pattern of persistent non-co-operation and evasion
The Court was satisfied in Josa Civil Group that there was a pattern of "persistent non-co-operation and evasion" which satisfied the preconditions for making of an order for search and seizure of books and records. The liquidator had evidence to demonstrate that they had taken significant steps to obtain the books and records of the Company, including the following:
- in accordance with section 530A, the liquidator correctly issued four requests to the first defendant for the books and records of the Company, but received nothing;
- in accordance with section 530A, the liquidator correctly issued three requests to the second defendant for the books and records of the Company;
- the second defendant (after the first request) sent the liquidator a package of tax invoices and papers totalling approximately 1000 pages, but no other records or books;
- as the requests to the first and second defendant were substantially unsuccessful, the liquidator then asked the third defendant to produce books. After requesting an extension, the third defendant eventually provided a spreadsheet summarising various payments. The Court held that this spreadsheet was an indication that the author had access to a considerable quantity of books and records of the Company to prepare that spreadsheet;
- the liquidator had established that 17 vehicles were in the name of the Company and there were no transfer documents to establish their transfer, or any records of moneys being paid as consideration for any transfer; and
- the liquidator made requests for the details of the vehicles to the second defendants with no response. The third defendant noted that he was not aware of any vehicles currently in the Company's name.
Getting the information the liquidator needs
Josa Civil Group demonstrates that the Court is prepared to make search and seizure orders, in particular where it appears that there has been concealment or removal of valuable assets and little to no co-operation on the part of the directors in the course of the liquidation. In these matters, the section 530C warrant procedure proves to be a very fast and effective means of securing the assets pending a later determination as to ownership. Obtaining a search and seizure warrant under section 530C could be more cost and time efficient, assuming the criteria can be met, than issuing examination summonses under sections 596A or 596B of the Act, because a liquidator is able to take a self-help remedy to obtain access to documents rather than rely on compliance by directors and other third parties.
Despite its obvious benefits, there remains a high bar to obtaining a search and seizure warrant pursuant to section 530C. The ex parte nature of the application means that a liquidator has a heavy onus to provide to the Court a fulsome and extensive evidentiary basis upon which an order ought to be made. Further, on the basis that orders can be made in the absence of the defendant, the Court will closely scrutinise the application before permitting a liquidator take steps to forcibly enter a company's premises and effectively break into a building and obtain the documents.
Given this, before taking steps to pursue orders under section 530C, a liquidator should ensure to consider and take all available alternative reasonable steps to access information. Liquidators should take detailed records of such steps to demonstrate to the Court evidence of continued and exhaustive requests for books and records made of the company's directors to ensure that if an application to the Court is required, there is fulsome and detailed evidence of the extent and efforts of those requests.