The court-appointed restructuring officer overseeing the liquidation of First Leaside Group is seeking the repayment of $1.6-million of cash that was removed from the investment firm last year by founder and former chief executive officer David Phillips.
The money consists of $500,000 Mr. Phillips allegedly took from First Leaside to repay a loan he had earlier made to the company, as well as $1.14-million Mr. Phillips allegedly withdrew from the company’s bank account in 2011 to pay “personal and household expenses.”
In an affidavit filed Thursday in Ontario Superior Court, chief restructuring officer Gregory MacLeod said it appears Mr. Phillips typically decided at year ends whether some of the expense money paid to himself by First Leaside would constitute part of his annual compensation as salary or as a dividend.
“I understand that the independent committee was not aware of these advances,” Mr. MacLeod said in the affidavit.
“The independent committee has advised me that, since the board of directors of [First Leaside] did not approve any payment to Mr. Phillips for 2011 other than base salary, I should take steps to seek repayment of the 2011 Phillips loans.”
Mr. Phillips resigned earlier this year as the Uxbridge, Ont.-based investment firm filed for bankruptcy protection, leaving about 1,200 investors in the lurch.
Earlier this month, the Ontario Securities Commission alleged Mr. Phillips and senior salesperson John Wilson committed fraud for continuing to raise $19-million in new funds from investors last fall without informing them about the company’s financial problems detailed in a review by Grant Thornton last August.
Mr. Phillips has denied the OSC allegations, and his lawyer, Alistair Crawley, has argued the OSC knew about the Grant Thornton report last year and did not require its disclosure to investors.
Mr. Crawley said Thursday that his client is just starting to examine the repayment requests now.
He said First Leaside’s business operations were run out of Mr. Phillips’ house in Uxbridge, so there were legitimate overhead expenses related to the business for which he was routinely reimbursed.
“My understanding is that in previous years, the same thing was done each year,” Mr. Crawley said.
A recent court filing in the bankruptcy protection case alleges Mr. Phillips took $500,000 from First Leaside last November to repay a loan he had made to the company two months earlier.
The money was transferred on Nov. 3, three days after First Leaside agreed with an OSC request to cease all trading, and on the same day that an independent committee was appointed to control the company.
Mr. MacLeod’s affidavit notes that accounting firm Grant Thornton, which was appointed as a monitor to oversee First Leaside, has expressed concern that the $500,000 transfer appears to constitute a preferential payment to Mr. Phillips over other creditors of investment firm.
A report by Grant Thornton, also filed in court, includes copies of two letters sent to Mr. Phillips earlier this month demanding repayment of the $500,000.
“The transfer appears to the monitor to be either a preference, a transfer at undervalue or a fraudulent conveyance as those terms are used” in federal and provincial bankruptcy acts, the letters state.
The letters to Mr. Phillips from Grant Thornton do not demand repayment of the additional $1.14-million in compensation, but Mr. MacLeod’s affidavit said the payments are being reviewed by the monitor.
In its monitor’s report to the court, Grant Thornton said it is still awaiting a formal response from Mr. Phillips about the $500,000 loan, and will consider bringing a court motion to seek an order for repayment of the money.