On 4 February 2020, the Federal Court of Australia considered the circumstances in which it might be said that a provisional liquidator of a company ought not be appointed as the official liquidator because of an alleged "reasonable apprehension of bias". The issue was ventilated before the Court in the matter of  Frisken (as receiver of Avant Garde Investments Pty Ltd v Cheema [2020] FCA 98.

Appointing a provisional liquidator

The Court has the discretion to appoint a provisional liquidator "at any time after the filing of a winding up application and before the making of a winding up order or, if there is an appeal against a winding up order, before a decision if the appeal is made" (section 472(2) of the Corporations Act 2001 (Cth)) (the Act).

The functions and powers of the provisional liquidator is conferred on him or her by the legislation, the relevant rules, or by order of the Court (subsection 472(3) of the Act). Provisional liquidators also have the power to continue the affairs of the company (subsection 472(4)(a)).

Provisional liquidators are commonly appointed if there is no dispute as to the insolvency of the company and there is an immediate need for an external administrator to protect the company's creditors. Accordingly, the day following Mr Banerjee's appointment as provisional liquidator to Avant Garde Investments Pty Ltd (Company), he convened a meeting for the Company's secured creditors to discuss funding arrangements for his investigations into the Company's financial affairs, including whether any voidable transactions took place.

Appointing a liquidator following completion of the Company's provisional liquidation

Following the completion of the provisional liquidation of the Company, on 4 February 2020 an application to wind up the Company was made, and a dispute emerged between the director of the Company and the provisional liquidator as to who should be appointed as liquidator.

When assessing whether or not Mr Banerjee should be appointed as liquidator, the Federal Court had regard to the "three guiding principles" that Derrington J referred to in Deputy Commissioner of Taxation, in the matter of WD Hall Pty Ltd v WD Hall Pty Ltd [2017] FCA 767 (WD Hall) at [5]:

  1. Liquidators must be independent and have an appearance of independence to the company's creditors, so as to avoid any reasonable apprehension by any creditor that the liquidator lacked impartiality due to a prior association with the company, including its creditors;
  2. Liquidators should not be chosen by the directors or other principals of the company, as the interests of the creditors must sit independent from the interests of the company; and
  3. The fees of the liquidator – as the Court would prefer a liquidator with less costly rates.

Had the well been poisoned?

The director of the Company argued for the appointment of a liquidator other than Mr Banerjee, because the "conduct of Mr Banerjee subsequent to his appointment as provisional liquidator is such that a reasonable person might have a reasonable apprehension that Mr Banerjee, if appointed as liquidator, might not be impartial."

The director relied on the expansive principle that a liquidator must be impartial and fair when carrying out its duties as a liquidator in the best interests of creditors, and as such, they must not have any prior involvement with the Company, any of its directors, major shareholders or creditors. The director pointed to the following conduct of Mr Banerji:

  1. Mr Banerjee was retained and represented by the same solicitors as the solicitors for the receiver of the Company following his appointment as provisional liquidator;
  2. An affidavit by Mr Banerjee was prepared for him and filed by the solicitors for the receiver, which was also said to be filed on behalf of the receiver; and
  3. Mr Banerjee convened a meeting only for secured creditors of the company seeking funding for his investigations into the affairs of the company.

In assessing whether there existed any reasonable apprehension that Mr Banerjee could not continue impartially, Jagot J found that "the principles referred to in WD Hall in all of these circumstances weigh heavily in favour of the appointment of Mr Banerjee as a liquidator". Some key factors findings of the Court included:

  1. At all times, Mr Banerjee was independent and had the appearance of independence from all creditors;
  2. Directors or other company principals should not appoint a liquidator "because of the inevitable perception of bias such an appointment might arise";
  3. Mr Banerjee had already done a substantial amount of work, and as such, it would be efficient for the provisional liquidator to continue the liquidation of the Company;
  4. Mr Banerjee's fees are less than the fees of the director's proposed liquidators;
  5. Mr Banerjee's meeting with the secured creditors to obtain funding was a rationale step, and it may be inferred to protect the interests of both secured and unsecured creditors; and
  6. Mr Banerjee retained new independent solicitors to act on his behalf, as he had initially retained the same lawyers who acted for the receiver. This finding was in response to a submission made by the director of the Company's to the effect that the "well has already been poisoned" and that Mr Banerjee is therefore no longer independent.

How to avoid poisoning the well

The starting point is that all liquidators including provisional liquidators must act in the best interests of the company's creditors, by ensuring they are, and appear to be, completely independent and impartial. This impartiality may come under attack if there are common legal representatives acting for the liquidator of a company and other interested parties, or where the referrer of an external administrator has a vested interest in the company which is at odds with the interests of creditors as a whole.

When assessing whether a liquidator should be nominated, the Court will also look at cost and time efficiency factors, which include the nominated liquidator's fees and whether the nominated liquidator has knowledge of the company's affairs by reason of its work done as provisional liquidator.