TGIF 14 February 2020: Out of the shadows: ASIC investigation of insolvent trading results in prison sentence for shadow director

This week’s TGIF considers ASIC’s efforts to pursue enforcement action against three former directors of the Kleenmaid group, resulting in the first sentence of imprisonment for a ‘shadow director’.

What happened?

The Kleenmaid group was a whitegoods distributor, founded in 1980.  

Administrators were appointed to the group in April 2009, at which point the group’s debts amounted to approximately $96 million.  

Shortly after, ASIC commenced an investigation into the group’s affairs, focussing on three individuals who were or had previously served as directors: Andrew Eric Young, his brother Bradley Young, and Gary Collyer Armstrong.

In 2014, the three individuals were indicted on charges of fraud and insolvent trading in breach of section 588G(3) of the Corporations Act 2001 (Cth).  

Notably, while Armstrong and Bradley Young were directors for all or part of the period during which the conduct occurred, Andrew Eric Young resigned as a director prior to November 2007.  Regardless, he was an equal focus of ASIC’s investigation, and was ultimately found by a jury in the District Court of Queensland to be a ‘shadow director’ within the meaning of the Corporations Act 2001 (Cth).[1]  

This marks the first occasion on which a shadow director has been convicted and sentenced to prison for insolvent trading charges.

The District Court proceeding   

ASIC’s case against Andrew Young culminated with him being found guilty of nineteen offences, including:

• seventeen counts of criminal insolvent trading in relation to debts exceeding $4 million (incurred after he had resigned); and
• one count of fraud arising from dishonestly removing $330,000 from a company bank account, to an account of an unrelated entity from which he stood to benefit, two days prior to the appointment of administrators in April 2009.  

Last week, Mr Young was sentenced to nine years with a non-parole period of four years in relation to the fraud offences and an additional three years for the insolvent trading offences to commence from his parole eligibility date, of which he must serve at least 12 months.  

He will now join the other Kleenmaid directors who are serving similar lengthy sentences for fraud and insolvent trading offences.

Commentary

ASIC’s ‘why not litigate’? mantra has been the subject of numerous headlines in the aftermath of the FSRC.  Whilst those under the regulatory microscope have included the banks, financial planners & advisers, the pursuit in this instance serves as a warning to directors, executives and their advisors of the reach & ‘new-found’ conviction of the regulator.

Typically, a breach of the duty to prevent insolvent trading can lead to significant civil liability. The corporate veil is lifted, personal assets are at stake and reputations are on the line.  However, it should not be forgotten that, should the incurring of the debt be considered dishonest, criminal penalties can apply under s588G(3).

Mr Young will now serve the next five years (at least) in prison.