Owen, in the Matter of RiverCity Motorway Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (“RiverCity”) [2014] FCA 1008

It has been 'accepted practice'1 in company liquidations in Australia for a Committee of Inspection (COI) to be appointed by a meeting of the creditors of the company. The validity of a COI so formed has, however, since the 2010 decision of Judge Lunn inJindal Transworld Pty Ltd v Scottsdale Homes No 10 Pty Ltd (No 2) (Jindal[2010] SASC 210 been in doubt as a result of Judge Lunn’s finding that a COI can only be appointed validly under section 548(1) of the Corporations Act 2001 (Cth) (the Act) if, in addition to a meeting of creditors, a separate meeting of contributories is held.

Significantly, if a COI has been invalidly constituted, then the liquidators are potentially exposed to the risk of challenge to their reliance on past COI approvals to draw remuneration and take other steps in a winding up.

In the recent Federal Court judgment in RiverCity, Justice Greenwood considered Jindal and respectfully disagreed with Judge Lunn’s construction of section 548(1) of the Act. Greenwood J found that section 548(1) only required the liquidator to convene separate meetings of the creditors and contributories if 'requested' by a creditor or a contributory to convene such meetings2.

Legal principles

Section 548(1) of the Act provides that:

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:

(a)      whether a committee of inspection should be appointed; and

(b)      where a committee of inspection is to be appointed:

(i)    the numbers of members to represent the creditors and the contributories, respectively; and

(ii)    the persons who are to be members of the committee representing creditors and contributories, respectively.

Differences between the determinations of the meeting of creditors and the meeting of contributories can be resolved by a court (section 548(2)). 

In the context of determining whether the Court had jurisdiction to approve a liquidator’s remuneration under s 473(3)(a) of the Act, Judge Lunn considered whether a COI had been validly appointed under section 548(1) where the creditors’ meeting alone had resolved to appoint the COI. Notwithstanding that there was no evidence that the liquidator in that case had been “requested” to convene a meeting of contributories, Judge Lunn found that no COI is established under section 548(1) until both the meetings of the creditors and the contributories have been held, and, if they differed, after a Court has made an order under section 548(2).3

RiverCity

The factual background to the proceedings can be briefly stated.

  • In RiverCity Greenwood J considered an application by the former administrators of the RiverCity Motorway Group of companies, who were later appointed by resolutions of the creditors as joint and several liquidators of those companies, for a range of orders and directions including orders as to the validity of the appointment of a COI to two of the companies, namely RiverCity Motorway Management Limited (RC Management) and RiverCity Motorway Services Pty Ltd (RCM Services). A COI was elected by creditors for both RC Management and RCM Services at the second meeting of creditors held on 8 July 2014.
  • There had been no request made to hold separate meetings of creditors and contributories, and the question of whether a COI “for the purposes of representing the creditors” might be formed was raised at the meeting of creditors by the Chairperson.
  • The liquidators sought an order under section 511 of the Act that each COI was validly appointed notwithstanding that there had been no separate meeting of the contributories of the two companies. 

Greenwood J respectfully disagreed with Judge Lunn’s decision in Jindal, instead finding that:

“Section 548(1) casts a mandatory obligation upon the liquidator only in the circumstances upon which that obligation is pre-conditioned. In other words, the liquidator must convene separate meetings of the creditors and contributories if requested by a creditor or a contributory to convene such meetings” 4 (emphasis added). 

However, had a request for a separate meeting been made, the liquidators of RC Management and RCM Services would have fallen under a mandatory obligation to comply with s 548(1)5.

Accordingly, as there had been no request in the present case, the appointment of the COI which followed was not rendered invalid because no separate meeting of contributories had been held6.

In the result, Greenwood J made declarations under s 511 of the Act that the COI formed for each of RC Management and RCM Services was validly established by resolution of the creditors of each company.

In the alternative to the application under section 511 of the Act, the liquidators also argued that the Court should make an order pursuant to s 1322(4)(a) of the Act that the COI had been validly appointed, notwithstanding that a meeting of contributories was not held, on the ground that there was no substantial injustice.

Section 1322(4)(a) of the Act provides that:

Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:

(a)      an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation.

Even if a failure to convene a separate meeting of contributories had rendered the appointments invalid, Greenwood J was nevertheless satisfied that the proposed order (confirming the validity of the COI) was properly supported by s 1322(4)(a) of the Act noting that the companies concerned were in a creditors’ voluntary winding up rather than a Court ordered winding up, such that s 497(10) applied7.

Key take away points

The decision in RiverCity supports what has been considered usual practice in having a COI appointed by a meeting of creditors alone without necessarily having a meeting of contributories. Insolvency practitioners may now feel less concerned about the risk of reliance on past COI approvals where there has been no requestmade to hold separate meetings of creditors and contributories.

The authors expect that RiverCity will be followed in the future, because in the authors’ opinion, Greenwood J’s decision is based on the correct construction of s 548(1) of the Act.

Insolvency practitioners should, however, continue to be mindful of any 'request' that might satisfy the pre-condition under s 548(1) and thereby impose the mandatory obligation to hold separate meetings of creditors and contributories.