This week’s TGIF considers an objection by directors and related-party creditors to a liquidator retaining solicitors who had previously acted for a substantial creditor in proceedings against the company.

What happened?

On 15 August 2016, a statutory demand was issued to the operator of a Chinese dumpling restaurant. The restaurant operator failed to comply with the demand and was wound up by order of the Court. The petitioning creditor also obtained orders for the appointment of a liquidator to the restaurant operator.

The liquidator proposed to engage the same solicitors retained by the petitioning creditor in respect of:

  • proposed examinations of, amongst other persons, the directors of the restaurant operator; and

  • separate proceedings (in which the restaurant operator was a defendant) to set aside a statutory demand issued by the liquidator to a related company of the restaurant operator.

The related company was recorded in the RATA as owing $417,491 to the restaurant operator and was its only substantial asset.

The application by the liquidator to retain the solicitors under section 477(2B) of the Corporations Act 2001 (Cth) was opposed by the directors of the restaurant operator and related-party creditors (together, the interested persons).

Grounds of opposition

The primary objection advanced was that the solicitors lacked independence having previously acted in proceedings against the dumpling restaurant. It was asserted that “significant animosity” had arisen between the directors of the restaurant operator and the petitioning creditor and that had emanated, in part, from the solicitors.

It was not suggested that the liquidator lacked independence. Rather, it was submitted that a fair minded and disinterested lay observer might reasonably apprehend a lack of impartiality.

Was it appropriate for the liquidator to engage the same solicitors?

The liquidator adduced evidence that he considered it to be in the best interests of creditors for the same solicitors to be engaged given:

  • the liquidator was unfunded and the solicitors were willing to be paid out of recoveries; and

  • those solicitors had considerable knowledge of the restaurant operator, and the wider corporate group, through their own enquiries such that it would “keep costs down” to retain them.

Gleeson JA ultimately agreed with the liquidator’s position and made orders to approve entry into the retainers. In doing so, her Honour observed that there is no absolute or universal rule that prevents a liquidator from retaining solicitors who also acted for a creditor.

However, reference was made to recent authority to the effect that:

  • where an administrator or liquidator retains lawyers for a secured creditor, a conclusion can readily be drawn that there may be a tendency to favour certain interests (due to the divergence of interests with unsecured creditors); and

  • it is generally undesirable for the liquidator to retain the same solicitors as a substantial creditor.

Notwithstanding the above, her Honour noted the guiding principle on such an application was whether, in the circumstances, such an arrangement offends the requirement for independence of the liquidator.

In the present case, her Honour was not persuaded the proposed retainers would give rise to a reasonable apprehension of bias. Rather, it was considered to be in the best interests of all creditors that the liquidator seek to recover the major asset of the dumpling restaurant and investigate the reasons for its collapse.

Further, there were practical advantages and costs savings if the same solicitors continued to act and any assertion of the possibility of a conflict of interest and duty for those solicitors was rejected.

Whilst the courts have regularly cautioned against an insolvency practitioner engaging solicitors who act for a substantial creditor, there is no absolute rule preventing that course. Where an application of a similar nature is made, the central consideration will be what is in the best interests of creditors.

Nonetheless, it is imperative to remain alert as to the obligations owed to the Court and the possible need for independent advice.

It may also be prudent, depending on the circumstances of the application, for an insolvency practitioner to provide notice to any interested parties (be they related-party creditors, directors or otherwise) so that an opportunity is provided to be heard.

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