Victorian building company found guilty of trading while bankrupt

A self-employed builder from Victoria has been found guilty of trading while insolvent and ordered to complete 250 hours of unpaid community service in a year.

In August 2009, Timothy Watson of Mornington, Victoria, was made bankrupt, but continued to trade without advising some customers he was an undischarged bankrupt.

Watson, who traded under the company Wat’s on Top Constructions, obtained $73,372.50 by promising to supply goods and services to a person without informing them of his financial status.

Watson was convicted in the Dromana Magistrates’ Court earlier this month and, in sentencing, Magistrate Holzer said Watson had misled the customer and needed to understand the consequences of his bankruptcy status.

PPB Advisory partner and insolvency expert Mark Robinson told SmartCompany individuals who are insolvent cannot obtain money from a person for their product or services unless they have informed a credit provider.

“An individual under the Bankruptcy Act is not allowed to incur credit over a certain threshold without informing the credit provider. Certainly an individual cannot gain credit more than their threshold amount without informing their provider.

“As long as the bankrupted person has disclosed to the credit provider they are an undisclosed bankrupt and the provider of money is still happy to lend, then it’s okay. This typically happens in family arrangements,” he says.

SmartCompany contacted Watson for comment but he failed to reply prior to publication.

Earlier this week, Tasmanian timber company Gunns group was found by administrators to have potentially traded while insolvent, pending further investigation.

The investigation conducted by PPB Advisory administrators Daniel Bryant, Ian Carson and Craig Crosbie found the date of the company’s insolvency was September 21, 2012 at the latest, but could potentially be dated as early as March 2012.

Robinson says it is much more difficult to determine the precise date of bankruptcy for a company compared to an individual.

“Companies are a lot more complex because they involve lots of people, a lot of workers and owners and management. This makes coordination of the state of knowledge between the three camps difficult.

“For example, a worker could be out ordering wood without the understanding of management or the owners. It’s a grey area and depends on what information was relayed to the directors. Did they receive good info from the management?” he says.

Robinson says multiple business transactions in a day provide a further challenge to company directors in determining the insolvency date.

“In a big company, working out at any one day how much money comes in and how much went out is a complex thing. Because of this complexity it becomes a grey area. The law is very explicit, but actually working out when the corporation should have reasonably thought that to be the case is quite difficult.

“There are only a handful of trading while insolvent cases which have been successful in court because it is a difficult area to prove, it has proved problematic for liquidators,” he says.

The timber company has a debt of $3 billion and the administrators are also urging Gunns Group representatives be investigated by liquidators for possible breaches regarding the use of third party funds for general operational costs.

In terms of penalisation by the courts, Robinson says penalties are variable depending on the case of the person or company involved.

“It all goes to the court’s view on the person’s culpability. Our court systems are more about remediation and getting people to do the right thing.

“If it became obvious that this person had access to the money to make compensation in this form, they would have ordered that. Otherwise they are just left with a custodial sentence or community service sentence like the builder,” he says.