Based on the current state of judicial consideration of s 548 (1) of the Corporations Act 2001 (Cth) (the Act), liquidators cannot be certain that a committee of inspection (COI) established at a general meeting of creditors alone is valid with the consequence that liquidators may be concerned about their reliance on past and future COI approvals to draw remuneration and take other steps in the winding up.

Re: the Bell Group Ltd (In Liquidation)

Ex Parte Antony Leslie John Woodings as Liquidator of the Bell Group Ltd (In Liquidation) [2015] WASC 88 (“Bell Group”)

The judgement of Pritchard J handed down on 18 March 2015 in Bell Group has again cast doubt on the generally ‘accepted practice’ in Australia regarding the appointment of a COI.1

Justice Pritchard held that s 548(1) of the Corporations Law (the Law) requires liquidators to hold separate meetings of creditors and contributories to determine whether a COI should be established as well as the number and identity of that COI’s members.2

The decision in Bell Group contrasts with the construction of s 548(1) of the Act (which is almost identical to s 548(1) of the Law) preferred in Re RiverCity Motorway Pty Ltd; Ex Parte Owen (RiverCity).3 In RiverCity Greenwood J held that separate meetings were only necessary if there was a request from either creditors or contributories. If the liquidator had initiated the appointment of a COI then only a meeting of creditors was required.4 The decision in RiverCity reflected what had become standard practice for liquidators in appointing COIs.

Background

Section 548(1) of the Act is as follows:

  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; and
      2. the persons who are to be members of the committee representing creditors and contributories, respectively.

Section 548 of the Law is the statutory predecessor of the current s 548 of the Act, and is applicable in Bell Group because the order for the winding up of TBGL was made prior to 23 June 1993.5

Bell Group

In Bell Group, the liquidator of the Bell Group Limited (TBGL) sought an order under s 1322(4) of the Act declaring that the appointment of the COI at a general meeting of creditors was valid notwithstanding any contravention of s 548 of the Law (by reason that a meeting of contributories had not been convened).

Pritchard J considered two issues in relation to the application of s 548(1) of the Law in the present case.

The first issue was whether the consideration of whether to establish a COI requires a request to the liquidator by a creditor or contributory, or whether a liquidator can propose that the question be considered.6 Pritchard J considered that 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).  The requirement that the request come from a creditor or contributory ensures that the expenditure of time and money involved in arranging separate meetings does not occur without some interest from at least one of those parties.7  Although noting that it was not necessary to decide the question in the present case, Pritchard J appears to doubt that a COI established at separate meetings of creditors and contributories would be invalid simply because those meetings were not arranged at the request of one of those parties.8

The second issue was whether the requirement to hold separate meetings of the creditors and of the contributories is contingent on a request being made to the liquidator by one of those persons.9

Pritchard J held that s 548(1) of the Law required that there be separate meetings of the creditors and contributories to determine whether a COI should be established and the number and identity of its members, and that the words “if so requested” pertain only to the question of whether the establishment of a COI should be raised for consideration. These reasons included regard to the natural and ordinary interpretation of the words, that there were few alternative ways to establish a COI and that the legislative history and context support such an interpretation.

While Pritchard J noted that RiverCity was “not on all fours” with the present case, as it concerned the application of s 548(1) to a voluntary application for winding up and that in a voluntary application, the statute permitted a meeting of creditors to determine matters set out in s 548(1), her Honour held that this would be deemed to be a meeting of creditors, and it was still necessary to have a meeting of contributories.10

Despite the contravention of s 548(1) Pritchard J made an order under s 1322(4) to validate the COI and its subsequent actions.11 In making this order, Pritchard J considered, inter alia, whether it would be just and equitable that the order be made and whether any substantial injustice would be caused. Justice Pritchard gave seven reasons why it would be just and equitable to make an order under s 1322(4):12

  • the desirability of appointing a COI given the costs incurred, the number and value of creditors' debts, time elapsed and the complexity of the litigation;
  • that TBGL was being wound up in insolvency and there was no realistic prospect of contributories receiving any amount;
  • the time, resources and costs of the liquidator arranging a meeting of contributories would be considerable;
  • the poor records of contact details and the time elapsed meant that there was no guarantee of achieving a quorum at any meeting of contributories which may have been held;
  • no contributory sought to be heard following the liquidator’s application;
  • had a meeting of contributories been held, the Court may have had to find that the contributories should not form part of the COI due to their lack of direct financial interest; and
  • the liquidator acted honestly in proposing the COI in that he made a conscious evaluation of the cost involved and made full disclosure to creditors regarding why he did not propose to call a meeting of contributories and the possible non-compliance with the Law.

Pritchard J also made an order under s 479(3) of the Law to remove any doubt as to the validity of the COI’s actions.13

Conclusion

Given the current uncertainty on the construction of s548 of Law and Act, it would be prudent for liquidators that have relied on (or wish to rely on) decisions of a COI established by a meeting of creditors alone to consider applying for similar orders as sought in Bell Group and RiverCity under sections 1322 (4) and 479(3) of the Law or Act (irrespective of whether the liquidation is a creditors’ winding up or not).

Following RiverCity, it was suggested that law reform of s 548 of the Act which was previously proposed14 may no longer be necessary.15 However, ARITA’s submission on the Insolvency Law Reform Bill 2014 again called for creditors’ meetings and committees to not involve contributories unless they have a financial interest in the administration.16

As Bell Group is likely to generate s 1322(4) applications which will only serve to reduce the funds available to creditors, law reform of s 548 of the Act remains warranted to provide certainty as to the process to be followed by liquidators to ensure a validly established COI.