Running down the assets of a company in advance of a likely liquidation can be invalidated by the courts, if it is seen to defraud creditors.

Two companies had set up a joint venture. Company A, a civil engineering company, carried out development, contracting and subdivision works; Company B laid stormwater and sewerage pipes in subdivisions. Company A approached Company B proposing a joint venture to contract for and carry out earth- moving and pipeline laying, with the profits to be divided. Company B would do the field work and Company A the paperwork.

Following a falling out between the two, Company A commenced court action against Company B to recover its investment in the project, but before the hearing Company A started a voluntary wind up and a liquidator was appointed.

After reviewing Company A’s assets, the liquidator found insufficient funds to pay all creditors. Company B claimed that Company A had been running down its assets.

Searches established that Company A owned five acres of land which it was in the process of transferring through another complicated joint venture agreement. To Company B this was a clear case of Company A trying to defeat its creditors.

The court decided that Company A was not able to transfer the land out of its ownership, and highlighted some disturbing elements, including a falsely dated document and false documents presented to the liquidator. The stop gave the liquidator around $1.3 million for the benefit of all creditors, but since the proceeds must be shared it remains to be seen how much will go to company B.

Should you require Business Law advice, please contact the Principal Solicitor for GMH Legal, Mr George Hanna on 02 9587 0458 or by email on ghanna@gmhlegal.com .