Appster may have traded while insolvent and made $750,000 in “concerning” payments, liquidator claims

The liquidator for collapsed app-development business Appster is rallying creditors to pursue legal action against founders Mark McDonald and Josiah Humphrey, alleging they traded while insolvent.

Releasing an anticipated statutory report into the affairs of Appster on Tuesday, liquidator Paul Vartelas revealed the once-upon-a-time market darling’s financial position had been worsening for several years prior to its collapse last December.

“It is my view that the company traded whilst insolvent prior to my appointment since the 31st of March 2018 and quite possibly since the 31st of March 2017,” Vartelas wrote in his report.

Creditors are now being asked to fund legal proceedings against the directors, due to the limited resources left after winding up the company’s assets.

Vartelas is also in talks with the federal government and will meet with the Department of Jobs & Small Business in March to discuss the possibility of taxpayer funding for litigation.

Appster — a company which developed mobile applications for businesses — shocked many in the industry when it collapsed, having once been hailed as the “next Apple” by commentators after growing revenue to $19 million in a few short years.

In a statement, Humphrey denied trading the company while insolvent.

“We had clear directions from both our finance team and CFO and local Australian accountant/advisor that oversaw our compliance and never once were we advised by either party that we were trading insolvent, nor would we knowingly trade whilst insolvent,” he said.

“We will strongly defend any allegation of insolvent trading and we firmly deny that we had any intentions of trading insolvent or knowingly traded whilst insolvent.”

Auditors refused to sign off on Appster books

The report details allegations KPMG refused to sign off on Appster’s accounts for the year ended March 31, 2017, expressing concern about the “worsening” financial position of the company and an unpaid invoice for their services.

Vartelas also alleged Appster had entered into arrangements with the Australian Taxation Office (ATO) which were not complied with. He said the ATO was preparing to pursue the founders but held off when the business fell into liquidation.

Appster booked a $154,000 loss on $11.9 million in trading income for the year ended March 31, 2017, and maintained a liquidity ratio of less than one, which indicates a dependency on selling assets or borrowing funds to meet short-term debt.

Questions over company money

In addition to making allegations of insolvent trading, Vartelas’ report has revealed new information about what happened to Appster’s money in the months prior to its collapse.

Former clients who have spoken to SmartCompany have raised questions over what happened to money they paid to the business in the lead up to its collapse.

The report details over $750,000 in transactions from Appster’s National Australia Bank (NAB) account to the American arm of the business Appster Inc. a little over a month before the liquidation.

Vartelas said a $369,112 payment was made to Appster Inc. in the United States on October 23 last year, followed by another payment of $385,840 on November 2.

This resulted in the NAB account, which held over $535,000 on October 23, being over-drafted to the tune of $228,400.

Vartelas was told the transactions related to outsourcing of work to the American arm of Appster and payment for Google Adwords relating to the company.

There was a further payment of $150,000 on November 27 last year out of the company’s NAB account to Appster LLP, based in India, which Vartelas was told related to payment of wages.

McDonald and Humphrey are directors of both Appster Inc. (USA), Appster LLP (India) and Appster Pty. Ltd (Australia).

Humphrey denied he or McDonald profited from the collapse of Appster, saying all transactions required a second authorisation from Appster’s finance team.

“The idea that Mark or I profited from the collapse or had the intention of trying to hide money is completely ludicrous and there is no evidence of this,” he said.

“The liquidator has access to all transfers and payments and there is no evidence of us taking money out or trying to hide money.”

Directors did not co-operate on payments, Vartelas says

Vartelas tried to verify claims made about the payments but was denied access to the books of both Appster Inc. and Appster LLP.

He said his investigation into the payments is ongoing, explaining he is not alleging “any impropriety” but nevertheless is raising concern about the transactions.

“It is my concern that the directors of the company may have breached their duties to the company in that they used their position to benefit the overseas related entities to the detriment of the company and its creditors,” Vartelas said.

Speaking to SmartCompany, Vartelas said he was told by solicitors for the directors that asking for access to the books was an “unusual request” and they would not be cooperating.

“As the liquidator, I have to verify things, it’s not usual or unusual, but what we’re saying here is they all have common directors [Appster Inc. and Appster Pty. Ltd.],” Vartelas says.

Humphrey said he has been working with the regulator regularly and supplied bank statements.

“The liquidator only asked for international account access five working days before this report came out,” he said.

“In that time we provided him bank statements to substantiate all transfers they inquired about.”

Vartelas maintains he was not provided with bank statements from Appster Inc or Appster LLP which showed money coming in and out of the businesses and where that money was paid to.

The American arm of Appster was dissolved in January and Vartales says he has been unable to determine where the money sent to the company went without “uninterrupted access” to its books.

McDonald is an officeholder in eight businesses, while Humphrey is an officeholder in 10, Vartelas said.

Speaking on the view he has formed about the management of the Appster business, Vartelas said it was evident the directors “struggled to control the operations of the company”.

“First of all, they were young people, second, the company’s business increased very quickly, sometimes increases sound good but it can also put you out of control,” he says.

Vartelas says a major part of Appster’s cost base were payments to India-based sub-contractors.

Legal action on the horizon

There are $890,875 in total credit claims against Appster Pty. Ltd, including $75,000 in secured claims, $407,788 in employee entitlements and $408,087 in unsecured creditor claims.

But, with less than $250,000 expected to be realised from remaining assets — after the intellectual property was sold to Appwiz owner Medicaller for $50,000 — Vartelas said there won’t be enough money in the business to fund a legal claim against the directors for insolvent trading.

He’s asked for indemnity from creditors to fund legal action, seeking between $80,000 and $100,000 to move forward with mediation.

SmartCompany contacted creditors to gauge interest in funding legal proceedings and was told by one they “absolutely” would be interested in providing funds.

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