In Re The Bell Group Ltd (in liquidation); Ex Parte Woodings [2015] WASC 88 (Bell) Pritchard J found that section 548 of the Corporations Act 2001 (Cth) required:

  1. a request from a creditor or contributory to be made to a liquidator to convene meetings to consider the appointment of a committee of inspection; and
  2. separate meetings of creditors and contributories to vote on the resolution.

Section 548 of the Corporations Act

Sections 548(1) and (2) of the Corporations Act read:

Convening of meetings by liquidator for appointment of committee of inspection--company not in pooled group

  1. The liquidator of a company must, if so requested by a creditor or contributory, convene separate meetings of the creditors and contributories for the purpose of determining:
    1. whether a committee of inspection should be appointed; and
    2. where a committee of inspection is to be appointed:
      1. the numbers of members to represent the creditors and the contributories, respectively; an
      2. the persons who are to be members of the committee representing creditors and contributories, respectively.
  2. If there is a difference between the determination of the meeting of creditors and the determination of the meeting of contributories, the Court may resolve the difference and make such order as it thinks proper.

As Pritchard J observed in Bell, the section is “somewhat awkwardly drafted in that it is not entirely clear what work is to be done by the words ‘if so requested by a creditor or contributory’”.

Section 548(1) has been the subject of two other decisions in the last few years. In Jindal Transworld Pty Ltd v Scottsdale Homes No 10 Pty Ltd (No 2) [2010] SASC 210 (Transworld) Lunn J held that “the proper interpretation of s 548(1) is that no COI is established under it until both the meetings of the creditors and the contributories have been held, and, if they differ, that the Court has made an order under sub-s(2).

In Re Rivercity Motorway Pty Ltd; Ex parte Owen [2014] FCA 1008; (2014) 102 ACSR 185 (Rivercity)  Greenway J disagreed with Transworld, saying “Section 548(1) casts a mandatory obligation upon the liquidator only in the circumstances upon which that obligation is preconditioned. In other words, the liquidator must convene separate meetings of the creditors and contributories if [and only if] requested by a creditor or a contributory to convene such meetings.”

In Bell at [38]–[47] Pritchard J explained why he preferred the construction in Transworld ie that, before a committee of inspection could be validly established, there had to be both (1) a request to the liquidator and (2) separate meetings of creditors and contributories. Pritchard J said, “the words ‘if so requested by a creditor or contributory’ refer to a request to the liquidator to make arrangements so that the question of the establishment of a COI can be considered (at separate meetings of the creditors and contributories).” Both of those meetings must be held and any difference between them resolved by Court application under section 548(2). According to Pritchard J, it is not open to a liquidator to convene meetings of creditors and contributories without a request to do so by a creditor or contributory.

The failure to strictly observe the requirements of section 548 of the Corporations Act raises the spectre of the invalidity of any resolutions passed by the committee of inspection. Pritchard J observed in Bell that, “while s 548(1) requires that the request come from a creditor or contributory, it is far from clear that the legislative intention was that a failure to observe that requirement (as occurred in this case) would, of itself, invalidate the establishment of any COI established. Indeed, there are good reasons for doubting that that was the legislative intention … it is difficult to envisage any logical explanation for a legislative purpose that would result in the invalidity of a COI established after a vote at separate meetings of the creditors and contributories simply because those meetings were not arranged at the request of one of the creditors or contributories.” The absence of a creditor or contributory request was characterised by Pritchard J as a procedural irregularity which would allow the operation of section 1322(2) of the Corporations Act. Whilst that applies to a committee created without a request from a creditor or a contributory, the position is likely different where a committee of inspection is established without resolutions at separate meetings of creditors and contributories. In that case, it may be necessary to seek an order under section 1322(4) of theCorporations Act.

Ultimately, the liquidators in Bell succeeded in obtaining relief for an irregularity under section 1322(4) of theCorporations Act. Even so, it would be unwise to assume that such relief will be available in every instance.

Section 497(10) of the Corporations Act

Section 497 of the Corporations Act requires a liquidator in a creditors’ voluntary winding up to convene a meeting of creditors within 11 days after being appointed. Section 497(10) provides that at such a meeting, “the creditors may determine the matters referred to in paragraphs 548(1)(a) and (b) and, where the creditors so determine those matters, a meeting of the creditors for the purposes of section 548 is taken to have been held and the determinations are taken to have been made under that section.

In Rivercity Greenway J found that section 497(10) effectively by-passed the requirement in section 548 that (1) there be a request from a creditor and contributory and (2) there be separate meetings of creditors and contributories before a committee of inspection could be validly appointed. However, in Bell Pritchard J found the opposite: “s 497(10) does not eliminate the need for a meeting of the contributories, which remains a requirement under s 548”.

Liquidation following administration

There is no provision in the Corporations Act that provides for a committee of creditors in administration to automatically become a committee of inspection in liquidation.

Although section 446A(3) of the Corporations Act provides that “Section 497 is taken to have been complied with” when a company transitions from administration to liquidation, according to Bell that does not eliminate the need for a meeting of the contributories, which remains a requirement under section 548.

When transitioning from administration to liquidation, it is necessary to comply with section 548 of theCorporations Act before a committee of inspection can be established in the liquidation.

Considering the importance of the decisions that a committee of inspection can make under the Corporations Act it is important that the committee is validly constituted.

Clearly, the state of the law is unsatisfactory and is ripe for immediate reform.