This week’s TGIF considers a decision of the Victorian Supreme Court which examined the merits of appointing special purpose liquidators in circumstances where a creditor was only willing to fund investigations if the appointment was made.
In May and June 2016, two registered education and training organisations (together, the RTOs) were placed into liquidation.
The RTOs had received millions of dollars in subsidy payments from the Victorian Government through the Department of Education & Training (DET). The payments were made by the Victorian Government to facilitate training services to eligible applicants pursuant to services and funding agreements.
The RTOs went into voluntary liquidation shortly after a review by an independent accountant was commissioned into the affairs of one of the RTOs by the DET. The independent accountant was engaged to conduct the investigations due to a number of instances of alleged non-compliance under the agreements including:
a failure to adhere to student eligibility guidelines;
pre-training review of students had not been completed; and
the quality of training services had been identified as inadequate to satisfy contractual funding obligations.
Each of the RTOs was placed directly into liquidation, as opposed to voluntary administration, which, it was submitted to the Court, suggested that neither had a trading operation capable of sale prior to the insolvency of each of the companies.
The liquidators appointed to the RTOs by the directors had insufficient funds to conduct investigations, however, indicated they were prepared to continue on a self-funded basis and, if necessary, seek funding at a later stage.
On 7 December 2016, the DET filed an application seeking orders for the appointment of two special purpose liquidators (SPLs) of the RTOs.
The DET was the major creditor of the RTOs and was willing to fund investigations into the affairs of the RTOs, but only if SPLs other than the existing liquidators were appointed to conduct the investigations. This was said to be, at least in part, because the liquidators appointed to the RTOs were selected by the directors.
The liquidators were not opposed to the appointment of the SPLS but sought orders limiting the scope of the appointment to:
investigating payments made pursuant to the specific DET funding agreements; and
making recommendations to creditors as to any rights of action which should be pursued.
Whilst the existing liquidators led evidence that they had commenced investigations into the directors’ conduct and antecedent transactions, it became apparent that such work had only started after the present application for the SPLs appointment had begun.
The critical question therefore was whether the contemplated examination of conduct and antecedent transactions should be conducted by the liquidators or the proposed SPLs.
The scope suggested for the proposed appointment necessitated a consideration of the relevant legal principles which apply in such circumstances and the desirability of SPLs being engaged by a major creditor to pursue a limited area of investigation.
The relevant principles
The Court has the power under the Corporations Act 2001 (Cth) (the Act) to appoint special purpose liquidators in compulsory liquidations.
That power has been held to extend, by s 511 of the Act, to a voluntary winding up. The essential question for the Court in exercising its discretion is whether the appointment would be just and beneficial to the general body of creditors.
Where the appointment of an additional liquidator is sought, it is often the case that the scope of such an appointment is in dispute. In many instances, the investigations can be limited by the Court to whether any rights of action exist, whether proceedings should be brought and the making of recommendations to creditors.
If none of the creditors is willing to finance investigations, it is likely that the appointment of an additional liquidator, at the instigation of an individual creditor, will be in the interest of the general body of creditors as the work envisaged may generate a fund that would benefit creditors as a whole.
The Court noted that it was not in dispute that investigations were required into each of the RTOs. It was observed that there appeared to be serious questions about the proper utilisation of subsidy payments received and the manner in which millions of dollars paid by the DET had been expended.
Ultimately, the Court held that the investigations should be undertaken by the proposed SPLs. However, the appointments were not “at large” such that the existing liquidators were to be replaced.
Whilst no adverse findings were made against the existing liquidators, the factors which led to the Court’s decision included:
the importance that liquidators are totally independent and seen to be so;
the fact that the firm of the existing liquidators had been appointed by the directors in other creditors’ voluntary liquidations; and
the existing liquidators work was preliminary in nature and the proposed investigations were to be properly and fully funded.
What does this mean for liquidators?
This is a further example of a case in which a special purpose liquidator has been appointed by a creditor who is only willing to fund investigations by those it has nominated and, in some instances, for a specific purpose.
It serves as a reminder of the principles which will apply on the consideration of such an application and the overriding consideration of the Court which is, and will likely continue to be, whether the appointment of a special purpose liquidator will generally benefit the creditors as a whole.