Mark Bench at Borro sent me an interesting article from ABC News in Australia about the ongoing bankruptcy at Mossgreen Auctions. The administrator, BDO, submitted a 100 page report with potentially damning content about the owners of the auction house, and went so far as to note that criminal charges should be pursued. One charge is taking money out of the client fund account in order to pay administrative and other fees. Mossgreen officials are disputing the BDO report.
ABC Australia reports
Source: ABC News AustraliaIn a revealing insight into the unregulated art auction industry, the administrator's report for the failed Mossgreen art auction house alleges the company breached nine separate sections of the Corporations Act.
The 100-page report, prepared over four months and distributed to more than 300 creditors this week, found the company — once the nation's biggest art and antique auction house — had debts of $13.8 million with assets of $3.2 million when it ceased trading on Christmas eve.
BDO's assessment of the company's former management is so damning it has recommended the Australian Securities and Investments Commission (ASIC) consider criminal charges once Mossgreen is in liquidation.
The Mossgreen directors are former chief executive Paul Sumner, whose wife, Amanda Swanson, is named in BDO's report as a de facto company director.
Former shareholders Jack Gringlas and Charles Leski were also directors until they cut ties with the company in July 2017.
BDO's investigation found the company potentially engaged in insolvent trading from as early as December 2013.
Mossgreen, which had offices in Melbourne, Sydney and Auckland, "operated what was termed a client bank account" into which it deposited money paid by purchasers at auction, the report reads.
"The company was in the practice of withdrawing funds from this bank account in a haphazard manner to meet general trading expenses and fund its ongoing losses," the report said.
"The withdrawals were generally in round sums (e.g. $100k or $200k) and did not reconcile to the commission due to Mossgreen."
Report also identified potential 'failure to maintain adequate records'
Mossgreen's directors are alleged to have unfairly preferenced payments and benefitted from unreasonable director-related transactions.
BDO's report, dated April 24, also identified a potential "failure to maintain adequate records" after the administrators discovered solid financial records but inadequate stock inventory.
"An initial sample check of 100 items with highest value estimates indicated that 98 of these items were no longer in the possession of the company," it reads.
Mossgreen's inventory listed 34,000 items in its possession consigned by hopeful sellers, but a stocktake by BDO found only 6,995 items.
"The stock management records were poorly maintained and grossly insufficient for a business in this industry," BDO concluded.
Other potential breaches are care and diligence, use of information, use of position and good faith, according to the report.
BDO also warned the directors could be found guilty of criminal offences if they were found to have been reckless or intentionally dishonest, and failed to exercise their powers and discharge their duties in good faith.
"We have identified a number of transactions and actions by the director and former directors that may be considered breaches [in this manner]," the report reads.
'Comparable to insider trading'
BDO identified auction behaviour which it described as tantamount to "insider trading".
"The director [Paul Sumner] acting as auctioneer would advise the room an item had been sold to an absentee bidder without any disclosure of who the bidder was or the relationship of the bidder to the director," reads the report.
In these instances BDO found the director was using a private account, Ivanhoe Trading, to acquire the item.
The problem, according to BDO, is the director might have been privy to additional provenance information, which might enhance the value of the item, a reserve might have been secretly agreed with a seller, or the director could manipulate an item's worth because he controlled marketing.
These practices, while not illegal in the unregulated auction world, were comparable to insider trading, BDO concluded.
The administration process has been delayed by an unsuccessful bid by BDO to recover some funds by requiring consignors to pay for the return of items held by Mossgreen.
The Federal Court on appeal held that general creditors should fund the return of consignor goods, but without funds available, the administrators have effectively transferred responsibility for returns to the owners of warehouses where the pieces were stored.
A creditors meeting is scheduled for May 4 in Melbourne.
BDO report 'highly inaccurate': Sumner
In a statement to the ABC, Mr Sumner said there would be "a great deal of scepticism around this latest salvo" from BDO after it lost court appeals this past week.
"As we speak I am working with a large team of former senior Mossgreen staff, all unpaid, to mop up the mess that BDO left when they walked away this week from any responsibility for all the valuable Mossgreen vendors' property that was located in the premises that they were given responsibility for," he said.
"As far as insolvent trading is concerned, I am also confident that as one of the directors of the Mossgreen board, I did everything I could to ensure that the company did not trade knowingly insolvent, but there were factors beyond my control that came into play.
"These will be reviewed by the appropriate authorities in due course and I am confident that this will prove that I acted at all times appropriately as the CEO.
"Anyone that knows me personally would be aware that I have always maintained a high degree of trust and support and I look forward to the opportunity in due course to clear my name of these scurrilous and defamatory allegations."
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