A short cash squeeze that became a total loss because the board trusted the wrong man.
The company they built
A small cap company listed on the ASX had spent years building real value before its IPO Listing. It owned land and held intellectual property with genuine commercial worth. Then a major project ran well over budget and used up most of the cash in the bank. The business wasn’t broke. Its assets were worth more than three times what it owed. It simply needed money to get through the next few months.
The plan to buy time
The directors took their fiduciary duties seriously. They knew they couldn’t let the company keep trading if it couldn’t pay its debts on time, so they acted early. Their plan was simple. Appoint a voluntary administrator to hold off creditors while they went back to shareholders for fresh capital. Once the money came in, the company would come out of administration and get back to work.
One director knew an administrator through his own network. He came recommended by someone the board trusted. At the time this seemed like a prudent strategy. What they didn’t give enough weight to is that every administrator is licensed by ASIC and their first priority is always protecting that licence. Whatever happened to the directors, he was always going to protect himself first.
Where it went wrong
The moment he was appointed, the administrator took control and the directors’ powers were suspended. Rather than support the capital raising, he went looking for someone to blame. He alleged the directors had breached the Corporations Act and lodged a formal complaint with ASIC. He then moved the company into liquidation with himself as liquidator. When the directors and shareholders tried to put fresh money in, he used the company’s own funds to stop them. He sold the land and every other asset. His fees came to about $10 million and used up every dollar. Creditors were owed about $3 million and got nothing. Shareholders lost everything.
1. The board appointed a stranger without checking him
The directors did the right thing by acting early. In our A13 assessment, they got it badly wrong in choosing who to hand the company’s interests to. Nobody checked his record with ASIC. Nobody called other directors he’d worked with or searched for past complaints. A personal recommendation stood in for proper checks. It’s the most common way boards pick an administrator. It’s also one of the costliest mistakes a board can make and in many situations directors may be personally liable and their assets are at serious risk.
2. One person got total control with no way back
Once an administrator is appointed, the board can’t overrule him. The directors thought they were buying time. What they’d really done was hand every decision to one man with no way of getting it back. He could block the raising, sell the assets and set his own fees. Shareholders who wanted to save the business ended up paying for the fight against their own rescue.
3. Nobody tested the other options first
The company had a short term cash problem. It wasn’t insolvent in any real sense. Safe harbour under section 588GA of the Corporations Act may have let the board keep control while it raised the money. Nobody looked at it. Administration was treated as a pause button when it’s really a handover.
ASIC later charged the directors. Every one of them was acquitted. The liquidator was investigated, charged and struck off. None of that brought back the land, the intellectual property or a single dollar for creditors or Shareholders.
The company wasn’t lost when the cash ran short. It was lost the day the board signed the appointment without checking who they were signing it over to. They found that out only when there was nothing left to save.
But it was too late. If someone accidently puts arsenic into your coffee, it’s all over regardless of the reasons why.
The lesson
The plan assumed the administrator would act in the company’s interest. When he didn’t, nothing was in place to stop him. A company worth three times its debts ended with creditors paid nothing and shareholders wiped out.
Proper checks, completing the A13 and following up of the A13 recommendations could have avoided all of it. A search of ASIC’s register of liquidators and the history of his modus operandi. Calls to directors he’d worked for before. A written estimate of his fees. His support for the capital raising, in writing, before he was appointed. Independent advice from someone with no link to him. A hard look at safe harbour before giving up control.
The directors did the hard part. They saw the problem early and acted on it. They lost the company because they trusted a recommendation and left the rest to luck.
If this story resonates
If your company is short on cash, or you’re thinking about handing control to an administrator or adviser you haven’t properly checked, your company may already be exposed the same way theirs was. The A13 Structural Vulnerability and Risk Exposure Analysis is thirteen plain questions. It’s confidential and free. It’s built to show you where you’re exposed. What you do with what it shows is entirely up to you.