Insights

Independence Day: Australian Court Refuses to Remove Liquidators

Independence Day: Australian Court Refuses to Remove Liquidators

In Short

The Situation: Should liquidators be removed under section 90-15 of the Insolvency Practice Schedule (Corporations) in circumstances where they engaged in preappointment discussions with a secured creditor, allegedly failed to investigate the company's affairs promptly, and retained the company's preappointment solicitors?

The Solution: Ordinarily, removal of liquidators will not be warranted where they have discussed potential funding with a significant secured creditor prior to their appointment, or where they have not had sufficient time and funding to conduct investigations. However, liquidators should think twice before retaining the insolvent company's preappointment solicitors, particularly where the solicitors are creditors of the company.

Looking Ahead: It is difficult for creditors to remove liquidators, even if the liquidators' conduct falls short of the ideal from a creditor's perspective. In considering a liquidator's conduct, a court will look at all circumstances of the liquidation, including the funding available to the liquidator and the time that the liquidator has had following appointment.

In Re FW Projects Pty Limited (in liquidation) [2019] NSWSC 892, the New South Wales Supreme Court rejected a creditor's application for the removal of the liquidators. In doing so, the Court addressed some issues that can arise concerning the independence of liquidators.

Background

In April 2019, Mr. Morelli and Mr. Devine ("Liquidators") were appointed as liquidators to FW Projects Pty Limited (in liquidation) ("Company") in a creditors' voluntary winding up.

In June 2019, Hindmarsh Construction Australia ("Plaintiff") commenced proceedings seeking to replace the Liquidators, restrain them from distributing the proceeds of a property sale to Manassen Holdings ("Secured Creditor"), and set aside a general security deed and mortgages entered into by the Company ("Security").

The Plaintiff's allegations against the Liquidators included the following:

  • The Liquidators failed to act independently and preferred the interest of the Secured Creditor by meeting with the Secured Creditor prior to their appointment and agreeing to accept $100,000 from the sale of secured property to fund the liquidation.
  • The Liquidators failed to investigate dealings between the Company and the Secured Creditor in connection with the Security and respond to document requests from the Plaintiff in a timely manner.
  • The Liquidators failed to act independently by retaining the firm of solicitors ("Solicitors") who had previously advised the Company, including in connection with the Security, and who were also a substantial creditor of the Company.

Decision

The Court held that the Plaintiff's allegations did not warrant the removal of the Liquidators. Relevantly, the Court found the following:

  • The preappointment meetings with the Secured Creditor did not undermine the Liquidators' independence because they were not "likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited".
  • It was reasonable for the Liquidators to consider how the liquation would be funded prior to their appointment where the Company's assets were substantially encumbered by the Security. The funding was also not provided subject to any conditions restricting the Liquidators' performance of their role.
  • The Liquidators did not act unreasonably in investigating the company's affairs given the short time since their appointment, the complexity of the Security arrangements, the voluminous requests for documents and removal application of the Plaintiff, and the fact that they were unfunded.
  • There was a risk that the Solicitors' objectivity to advise the Liquidators would be affected. This was because the Solicitors were a substantial creditor of the Company, and they had advised the Company on transactions that the Liquidators would be required to investigate (including the Security arrangements). However, because the Liquidators undertook to the Court to retain an independent firm following judgment, the Court was satisfied that the Liquidators' retainer of the Solicitors up until that point did not warrant the Liquidators' removal.

Principles Applicable to Removing a Liquidator

In making these findings, the Court engaged in a useful analysis of the legal principles applicable to removing a liquidator. Critically, the Court referred to Re St Gregory's Armenian School (in liq) [2012] NSWSC 1215, where Brereton J observed that the onus of showing cause for removal of a liquidator is not "lightly discharged" and that:

"…it should not be seen to be easy to remove a liquidator merely because it can be shown that in one or possibly even more respects, his or her conduct has fallen short of the ideal."

The principles relevant to an application for removal were summarised as follows:

  • It is necessary to consider whether the removal would be for the benefit of the liquidation, and the body of persons interested in it, but also for the confidence in the integrity, objectivity and impartiality of the winding up.
  • A loss of confidence based on reasonable grounds by creditors may, although it will not necessarily, justify removal of a liquidator.
  • If a liquidator has been generally effective and honest, the Court must think carefully before deciding to remove him and replace him. It should not be seen to be easy to remove a liquidator merely because it can be shown that in one, or possibly more than one, respect his conduct has fallen short of ideal.
  • It is important not to overlook the professional consequences for a liquidator of an order for removal.
  • It will be harder to establish a case for removal of a liquidator where a liquidation is well advanced, and he or she has become acquainted with the company's affairs.
  • A prior involvement with a company in liquidation does not necessarily prevent a person's appointment as a liquidator, if that involvement is not likely to impede or inhibit them from acting impartially, or give rise to such an apprehension.

The Court also hinted that reference to the Code of Professional Practice of the Australian Restructuring Insolvency and Turnaround Association may be helpful for such applications and noted that the Code was broadly consistent with the case law.

Three Key Takeaways

  1. Generally, it will be difficult for a creditor to persuade a Court that there are sufficient grounds for ordering the removal of a liquidator.
  2. Where a company's assets are encumbered, an insolvency practitioner can meet with a significant secured creditor prior to being appointed as liquidator to discuss how funding may be secured for the liquidation. Ordinarily, such a meeting will not by itself negatively impact the independence of the liquidator.
  3. In order to preserve independence, a liquidator must carefully consider whether it is appropriate to retain the insolvent company's preappointment solicitors or whether an independent law firm should be retained after appointment.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

 
We use cookies to deliver our online services. Details of the cookies and other tracking technologies we use and instructions on how to disable them are set out in our Cookies Policy. By using this website you consent to our use of cookies.