The Supreme Court of WA has found two Reliance Online directors breached their duties in purchasing Phil Doring Insurance Brokers (PDIB) in Queensland amid financial troubles and opposition from other directors.

The $1.1 million deal involved $300,000 payable on completion and with the $800,000 balance to be paid in monthly instalments over the next three years.

Justice Rene Le Miere said Andrew Paul Donnelly and Kimberley James Hanson had committed Reliance Online to a transaction that offered marginal benefit while exposing the group to the risk of insolvency if it couldn’t meet its obligations.

The judgment found Mr Donnelly had kept two directors, Keith Muller and Jonathon Fogarty, uninformed about the deal until it was complete and had not undertaken due diligence despite knowing the transaction was “riddled with risk” and that there was a deficit in the PDIB broking account.

“In negotiating and executing the Asset Sale Agreement, Mr Donnelly ignored the many red flags, that is indicators, that there were potential problems with the PDIB business,” Justice Le Miere said.

The judgment also says Mr Hanson knew other directors in holding company Vantage Holdings Group (VHG) were against more acquisitions due to the financial situation, but had committed to the transaction without reading or seeing the contract before he signed.

Mr Hanson knew the business was being acquired from receivers in “a distressed sale” but had relied on Mr Donnelly telling him the “broad parameters of the proposed transaction” and advice from a solicitor saying “all was in order” Justice Le Miere said.

“I find that Mr Donnelly breached the common law duty of care and skill he owed to each of Reliance Online and VHG as a director, and Mr Hanson breached the common law duty of care and skill he owed to Reliance Online as a director,” Justice Le Miere said.

Mr Donnelly and Mr Hanson also breached their statutory and common law duties to act in good faith and in the best interests of the companies, he found.

The judgment says Mr Donnelly and Mr Hanson started broking firm West Coast Group in 1998, later changing its name to Australian Reliance, which they operated as CEO and CFO. In 2012 they formed broker network Reliance Franchise Partners.

The group grew rapidly and funding was provided by Fopar, an entity related to Mr Fogarty, who had previously been a friend of Mr Donnelly.

But Justice Le Miere says the financial position became “perilous”, Mr Fogarty, a VHG director, had expressed dissatisfaction with the way the group was being managed and frictions increased.

Mr Fogarty wanted the Reliance group to find a buyer for its business so funds could be obtained to repay amounts owing to Fopar under convertible note deeds, the judgment says.

A Heads of Agreement was entered into with Coverforce on September 4 2015 for it to buy the business, apart from some entities including Reliance Online, in a deal involving cash and scrip, and giving Mr Donnelly and Mr Hanson equity.

But Mr Fogarty, on behalf of Fopar, ended the agreement in early December after Coverforce sought an exclusivity extension as it looked to instead fund the deal by debt and was about to enter talks with bankers. Fopar was a party as the convertible note deeds would be repaid out of sale proceeds.

“It was not unreasonable for Mr Fogarty to conclude that Coverforce did not have the capacity to complete the acquisition and to look for an alternative purchaser,” the judgment says.

On January 15 2016 VHG and its subsidiaries agreed instead to sell most of their insurance broking businesses, excluding Reliance Online, to PSC Insurance Group.

In the meantime, Mr Donnelly was alerted in October 2015 to an opportunity to buy PDIB, which was in receivership, but which he said in an email to a lawyer he would like to pursue as it was a 25-year-old business in a regional centre where it would be good to have representation.

The PDIB vendors agreed to sell to Reliance Online on November 6 2015, with the deal to include partial payment on completion and monthly instalments. VHG was guarantor of the Reliance Online obligations.

The judgment says Mr Donnelly had discussed the proposed PDIB purchase with Coverforce, while that transaction was still expected to be completed, but not with other members from his own board of directors who were opposed to further acquisitions.

Early in 2016 PDIB vendors demanded payment from Reliance Online of $30,000 GST and the first two instalments and claimed a breach of the Asset Sale Agreement as they were not told of the PSC deal and the effective exit of VHG as guarantor. The dispute led to Victorian court action, which was settled later in the year.

Reliance Online and VHG added Mr Donnelly and Mr Hanson to the legal action, seeking damages or compensation on the grounds they had breached their statutory and common law duties as directors or officers in executing the PDIB Asset Sale Agreement.

Justice Le Miere says it was not proved Reliance Online suffered any losses in operating the acquired PDIB business, but made other orders, including for costs.

Mr Donnelly and Mr Hanson were liable for $75,000 related to the Victorian court settlement and Mr Donnelly was liable to VHG for $90,654.24 for interest accrued on $1 million of debt owed by VHG, as a result of a Victorian freezing order, he said.

The court decision is available here.