Sheahan Lock: funded insolvency chase could net billions for ATO

Insolvency firm Sheahan Lock Partners has a plan it believes could help Canberra pocket billions from tax avoiders.

Sheahan Lock’s John Sheahan: ‘Tax schemes are still operating with impunity.’ Picture: Sam Mooy

After securing one of the nation’s biggest recoveries of missing tax money, insolvency practice Sheahan Lock Partners has outlined a plan it believes could enable the federal government to pocket billions of dollars in extra recoveries from tax avoiders.

John Sheahan, whose firm is in line to recover $125 million for the Australian Taxation Office, has had discussions with Malcolm Turnbull about unleashing a new wave of well-financed litigation against tax avoiders.

Mr Sheahan believes large numbers of tax schemes are still operating with impunity because of the reluctance of many insolvency practitioners to risk their own money on an aggressive hunt for ways to sue tax avoiders. He would like to see the federal government use litigation funders to help finance the search for causes of action against those in business whose companies collapse owing money to the ATO.

“When I spoke to Malcolm Turnbull, he is a businessman and he said: ‘If there are opportunities, why wouldn’t we invest more money?’ ” Mr Sheahan said.

“I think the resolution should probably come about through some commonwealth funding, but some private funding as well.”

Ian Lock, a partner in Sheahan Lock, said this extra funding could be allocated to a dedicated litigation fund that would finance preliminary investigations by liquidators, as well as any resulting litigation.

Mr Lock said private litigation funders already backed selected claims. “But what that misses, as a matter of course, is that we regularly examine directors and seek documents — and if people don’t produce them, we seek orders for the production of documents and then review all of that. All that costs money,” he said.

He said there would be “huge opportunities” to recover more money for the ATO if preliminary investigations were better resourced.

Mr Sheahan said the reason more money was not being recovered had nothing to do with any reluctance by insolvency practitioners to litigate.

“In the vast majority of cases these causes of action are never found because people are unwilling to put in the time and effort to find them,” he said.

John Walker of litigation specialist Investor Claim Partner said greater financial backing for investigations by liquidators would result in millions of dollars in additional recoveries for the ATO and other creditors of failed companies.

It was not uncommon for creditors to be deprived of the value of “soft assets” such as causes of ­action merely because liquidators had insufficient backing, said Mr Walker, who is ICP’s chief executive.

Litigation funder Patrick Moloney said the proposal from Sheahan Lock had merit and needed to be considered.

This was because “anecdotally it seems to be the position” that money was not being recovered for the ATO because causes of ­action were not being identified because of lack of resources.

Mr Moloney, who is managing director of funder LCM, said litigation funders were already involved in backing some preliminary investigations and it was not uncommon for liquidators to seek funding for the examination of directors.

But if the economics of becoming more involved in preliminary investigations were worthwhile, “you would have no trouble in getting the private industry to support it,” Mr Moloney said.

Mr Sheahan said the Prime Minister was “very, very interested to learn more about this”.

“We had a chat about it last year and he was fascinated about the potential recoveries that could be obtained,” he said.

Those potential recoveries could be worth “billions”, Mr Sheahan said.

He cited the example of his firm’s successful pursuit of members of the Binetter family, founders of the Nudie Juice business. The ATO is the major creditor of the Binetter company BCI Finances (in liquidation).

Before Sheahan Lock was appointed liquidator, another insolvency practice had concluded there were no assets in BCI that could be recovered.

After Sheahan Lock’s appointment, the firm found no financial assets in BCI.

Instead, it spent $100,000 of its own money investigating the company’s affairs “and no other practitioner is going to do that”, Mr Lock said.

With the support of an opinion from South Australia’s Dick Whitington QC and barrister Ben Doyle, they went back to the ATO and secured backing for a more ­aggressive strategy.

Instead of focusing on the absence of financial assets in BCI, the strategy focused on what the firm believed were breaches of directors’ duties.

The firm is now set to recoup about $125m for taxpayers, which is expected to be the biggest single recovery from the ATO’s Operation Wickenby inquiry into offshore tax avoidance.

In November, the Federal Court found that members of the Binetter family, including former Nudie boss Michael Binetter, had breached their duties as directors of family companies.

They had exposed their companies to tax bills by “back-to-back loan” schemes in which millions of dollars in undeclared money had been moved to bank accounts in Israel and Switzerland and then brought back to Australia as loans.

“There would be hundreds if not thousands of these circumstances in which people have done back-to-backs and the way in which they have been structured would give rise to massive claims to the crown,” Mr Sheahan said.

“The lesson for the commonwealth is there are massive potential recoveries. They are sitting on massive potential recoveries,” he said.

On Monday, a hearing begins in the Federal Court to formalise the amount the Binetters must pay the ATO. Other proceedings are on foot against a foreign bank that was party to the scheme.