THE directors of collapsed mining contractor Forge Group are set to come under investigation after the company's administrators found the group could have been insolvent for almost three months before its collapse.
According to a copy of the first report to creditors obtained by The Australian, administrator Ferrier Hodgson has recommended an investigation into whether the company was trading while insolvent.
The administrators have also flagged an investigation into the decisions of Forge's directors in the lead-up to its collapse, including the payment of director bonuses and other entitlements.
Forge went into administration and receivership last month amid estimated debts of $800 million.
The Perth-based group had a market capitalisation of almost $600m a year ago and posted a healthy profit in the 2013 financial year, but fell apart swiftly after experiencing major overruns at two of its power station construction contracts.
"Based on our preliminary investigations to date, we are of the opinion that the group may have been insolvent as early as November 2013," the Ferrier Hodgson report said.
The report revealed that Forge had racked up an unaudited loss in the seven months to January 31 of $326.5m, compared with the management's budget of a $52.4m profit for the half-year and the $62.9m profit recorded in 2013.
Ferrier Hodgson said its preliminary investigations had identified several reasons for Forge's collapse, ranging from ageneral downturn in the
resources sector to cost escalations from inferior engineering work and "insufficient process and risk control measures".
The report said Forge moved into "crisis mode" in its cash management from November while trying to carry out a series of restructuring efforts. Among them, the report said, was a takeover proposal from an unnamed party in early December offering a 20 per cent premium to Forge's share price at the time.
In February, the group received an offer from another party proposing to recapitalise Forge by selling off its US business, introducing new management and revising "certain aspects" of the company's contract to work at Gina Rinehart's Roy Hill iron ore mine.
The revelations around the prospect of Forge trading while insolvent will be of interest to the group's creditors, given the lack of proceeds likely to be available once it moves into liquidation.
Any finding that the company was trading while insolvent could leave the Forge directors open to pursuit for civil damages.
Whether the directors are liable for trading while insolvent will depend on whether they had reasonable grounds to believe their efforts to restructure the business would succeed, and that if successful the proceeds would be large enough to alleviate what Ferrier Hodgson said were "endemic cashflow deficiencies".
The report also shed light on the decision in Forge's final few months to move its executive team and head office from Perth to Sydney.
Ferrier Hodgson said the plan had involved the Forge board approving a $750,000 budget to move managing director David Simpson and other executives to Sydney and open an office. Included in the budget was a $250,000 payment to Mr Simpson, which was later reduced to $200,000.
The administrators said they had not yet formed an opinion as to the appropriateness of those costs.
