This week’s TGIF considers In the matter of ACN 151 726 224 Pty Ltd (in liq) [2016] NSWSC 1801, where the Court dismissed a creditor’s application to remove liquidators who had refused to conduct public examinations of a director.

What happened?

On 18 November 2015, the District Court of New South Wales entered judgment against Ridley Capital Holdings Pty Limited (the Company) in the amount of $660,862.62.

Two days after the judgment, liquidators were appointed to the Company in a creditors’ voluntary winding up. The judgment creditor (the Creditor) submitted an informal proof of debt in the winding up of the Company.

At the first meeting of creditors, the liquidators’ disclosed that the Company did not own any property, held two bank accounts with a balance of $956.36 and, as such, it was not anticipated that a dividend to creditors would be paid.

An offer to fund examinations

In February 2016, the Creditor indicated it was prepared to fund a public examination of a director of the Company pursuant to s 596A of the Corporations Act 2001 (Cth) (the Act). During a meeting between the liquidators and the Creditor’s solicitors, it was alleged that the Company had engaged in phoenix activity.

However, the Creditor’s offer to fund the examination was subject to two conditions:

  1. The Creditor was prepared to only “make a contribution” to the liquidator’s remuneration regarding the application for the examination summons.

  2. The liquidators were to also instruct the Creditor’s solicitors. At a subsequent meeting between the liquidators and the Creditor’s solicitors, the liquidators’ expressed some reservation with this course due to a potential conflict for those solicitors to be acting for both a creditor and the liquidators.

Was there evidence of any “phoenix” activity?

In any event, and in order to further consider whether there were any examinable grounds, the liquidators requested the provision of all available evidence to support the allegations and provided a quote from three “independent law firms” to conduct the examination. Sometime later, a small ‘subset’ of documents were supplied to the liquidators that the Creditor had obtained in the District Court proceedings.

Having assessed the ‘subset’ provided by the Creditor, the liquidators formed the view that the information contained therein did not give rise to sufficient grounds to conduct a public examination, and indicated their intention to finalise the winding up.

The Creditor subsequently filed an application in the Supreme Court seeking to have the liquidators removed under s 503 of the Act.

Was there cause to remove the liquidators?

The Court first considered the applicable principles required for removal of a liquidator and noted that the matters relevant would include:

  • whether the removal would be for the benefit of the liquidation; and

  • the need for confidence in the integrity, objectivity and impartiality of the winding up.

A number of reasons were advanced by the Creditor as being cause for removal, however, the majority of the Court’s reasoning was directed towards the refusal by the liquidators to use the Creditor’s solicitors to conduct the examination. On that point:

  1. The Court held there was reason to be concerned that the Creditor’s solicitors faced a ‘real and sensible’ conflict between their duty to take steps to advance the interests of the Creditor and their duty to advise the liquidators.

  2. The Court referred to the existing authorities, which indicated that, whilst not an absolute rule, it is generally undesirable for liquidators to retain solicitors who act for a substantial creditor.

  3. Consequently, the Court found there was a ‘fundamental difficulty’ with the Creditor’s approach, in that it sought to remove liquidators who were acting in accordance with the generally preferable approach.

Other criticisms of the liquidators’ conduct

The Creditor also argued there was a ‘perceived’ lack of independence of the liquidators and that they did not seem “interested” in conducting an investigation.

It was submitted on behalf of the liquidators that they could not be compelled to carry out work beyond their statutory obligations without remuneration or assets to cover the costs of an examination. The Court accepted the strength of this submission and noted that s 545 makes clear that they were not obliged to incur expenses to undertake an investigation unless funded or directed by the Court.

What had also become apparent, upon disclosure by the Creditor of the full range of relevant documents (as opposed to merely a ‘subset’) days before the hearing commenced, was that the liquidators now agreed that an examination would be warranted, provided they were funded and permitted to retain independent legal representation.

Such matters thus undermined the thrust of the Creditor’s submission and raised no real question in the Court’s view as to the liquidators’ independence or the adequacy of the performance of their role in an unfunded liquidation.

An alternative approach?

It was submitted on behalf of the liquidators that the Creditor could have sought authorisation from the ASIC to be an “eligible applicant” and therefore itself apply for examinations under s 596A of the Act.

In addition, the Court agreed with the liquidators that it might also have been appropriate for the Creditor to appeal the decision not to examine Mr Ridley pursuant to s 1321 of the Act.

Takeaways

The decision provides comfort to liquidators that they will be justified in refusing to conduct examinations in circumstances where a potential for conflict has arisen, the liquidation is unfunded and the documentation provides little basis to warrant further investigation.

It also serves as a useful reminder of the alternatives available when a creditor clashes heads with liquidators about public examinations including:

  • the ability to appeal a liquidators’ decision under s 1321 of the Act;

  • making an application to appoint a special purpose liquidator to conduct the examinations; or

the creditor approaching ASIC for authorisation itself to conduct the examination.