It was more lucky dip than logical calculation as liquidators of Edward John Harman’s failed investment companies squared off against Insolvency Service handling Harman’s personal bankruptcy. Company creditors claim some $26.1 million; bankruptcy creditors $19.3 million. At stake: $4.03 million held by Insolvency Service.
Mr Harman was bankrupted in 2009. He left in his wake some angry unpaid investors. His promises of wise investments had come to nothing. By his own admission, he had assumed complete control of the Fairthorne Investment group, ignored fellow directors, failed to properly record investor transactions and mixed the funds of separate investment companies. In 2008, these companies went into liquidation. Other directors ponied up three million dollars in an out of court settlement acknowledging their breach of directors’ duties. Fairthorne liquidators sued Mr Harman for a catalogue of directors’ duties allegedly breached, primarily reckless trading. Insolvency Service required proof of reckless trading before it would accept the liquidators’ claim in Harman’s bankruptcy. Then both parties were off to court to assess a value for claimed damages. Damages for reckless trading are ultimately at the discretion of a judge. Any payment to Fairthorne liquidators has the effect of reducing the pool of cash payable for Mr Harman’s personal creditors. A complicating factor was that some 48 per cent of Mr Harman’s personal creditors are also Fairthorne company creditors; he had guaranteed repayment to some investors of loans they made to the Fairthorne group.
The High Court grappled with questions of when the Fairthorne group became insolvent and to what extent investors losses might have been increased by Mr Harman’s reckless trading. Fairthorne liquidators were dealing with ghosts; a lack of proper accounting records hampered attempts to identify at what point Fairthorne companies became insolvent and to what extent decisions made by Mr Harman from that date caused further creditor losses. Having no concrete accounting evidence at its disposal, Fairthorne liquidators were forced to accept Insolvency Service assertions as to when the Fairthorne group became insolvent. Damages for reckless trading were agreed at $10.1 million. Associate judge Smith reduced the sum further to $6.42 million; making allowance for both the risk investors were assumed to have accepted given the high interest rates on offer and the possibility that market conditions rather than Mr Harman’s recklessness may have contributed, in part, to investor losses.
Creditors claiming in Mr Harman’s bankruptcy are likely to receive less than twenty cents in the dollar.
re Bankruptcy of Edward Harman – High Court (7.02.19)
19.036