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Court documents allege that Banksia Securities approved a merger with investment firm Statewide despite describing its loan book as "sh*thouse".
The deal was blamed for Banksia’a 2012 collapse, which left investors $660 million out of pocket.
Receivers McGrathNicol have now launched legal proceedings against the lender's former directors, auditors and legal advisers in the Supreme Court of Victoria, according to Fairfax Media.
McGrathNicol allege the directors breached their duties by singing off on the Statewide deal despite having knowledge of its “very significant risks”.
In a statement of claim, receivers said Banksia's financial position "substantially deteriorated" following the transfer of Statewide loans to Banksia.
"Had the amalgamation not occurred ... [Banksia's] true net asset financial position would not have significantly deteriorated," it said.
They allege directors "knew or should have known" that Statewide's loan book was high risk and that integrating the loan book into Banksia's balance sheet would expose Banksia to "serious financial harm".
Fairfax Media reports that during discussions on a possible merger, directors allegedly became aware of the risk of exposure to potential losses on the Statewide portfolio.
At a board meeting in 2009, Banksia officer Ian Hankin informed members there would be opportunities in the merger despite Statewide's "sh*thouse" loan book, documents show.
"This terrific opportunity has dropped in our lap that might enable us to move forward and do all sorts of things," he said, according to court documents.
"The negative is we've got a pretty sh*thouse loan book that could cause us some real angst."
Receivers also allege Banksia's auditors were negligent and breached their duty of care in their oversight of the company in the lead up to the collapse.