Entering into liquidation can be a scary time for any company and its officers, even one which chooses to do so voluntarily. However, the directors, shareholders and creditors of a company entering into liquidation do not have absolute discretion as to who they may appoint as the liquidator of the company. Together, the Corporations Act and common law principles of independence regulate the eligibility of a liquidator to be appointed to a company, and to remain in the appointment.

Overarching eligibility

Section 532 of the Corporations Act sets out who can and cannot act as a liquidator, or provisional liquidator, of a company.

Though the requirements of a liquidator vary between different company structures, to act as a liquidator of a public company, a person must be a registered liquidator and not fall within a category of disqualified persons.

A registered liquidator will be precluded, except with the leave of the Court, from acting as a liquidator of a company if they:

  1. owe the company or a related body corporate a sum greater than $5,000;
  2. other than in their capacity as a liquidator, are owed a sum greater $5,000 from the company or a related body corporate;
  3. are an officer of employee of the company;
  4. are an officer or employee of any body corporate that has security over company property;
  5. are an auditor of the company, or a partner or employee of an auditor of the company;
  6. are a partner, employer or employee of an officer of the company; or
  7. are a partner or employee of an employee of an officer of the company.

Exceptions to the rule

Despite the above restrictions, the creditors involved in a creditors' voluntary winding up can choose to pass a resolution that categories 3 – 7 above are not to apply so long as seven days' notice of the meeting has been given to every creditor, and the notice clearly states the purpose of the meeting.

Additionally, categories 3 – 7 above to do not apply to the appointment of a liquidator through a members' voluntary winding up of a proprietary company. A liquidator of a proprietary company is also not required to be a registered liquidator.

No strings attached – the need for independence

The statutory requirements for a person acting as a liquidator are not exhaustive. In addition to the above, the proposed liquidator must also be independent, and seen to be independent, of the company, its officeholders, its shareholders and employees.

The Court maintains a high bar in relation to the level of independence required of liquidators and are unlikely to countenance the appointment of a liquidator who is, or was previously, involved with the company.

Consequently, any indication of a liquidator lacking independence, for example, by declining to investigate alleged misconduct against a director or creditor that they have previously been associated with, will be treated very seriously. The simple appearance of impartiality can be sufficient in itself to have a liquidator removed.

The independence of a liquidator is critical for the liquidator to properly discharge their duties to investigate the affairs of the company in an effective and impartial manner, and for public confidence in the same.

That is not to say that the liquidator cannot have any prior involvement with the company in liquidation though. A liquidator with prior involvement with the company will still be eligible to act as the liquidator so long as the prior involvement "is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors": Advance Housing Pty Ltd (In Liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230.

What will constitute bias / absence of impartiality?

The test for whether a proposed liquidator has acted with apprehended bias was formulated by the High Court in Ebner v Official Trustee in Bankruptcy [2000] HCA 63 and confirmed in ASIC v Franklin [2014] FCAFC 85; (2014) 223 FCR 204.

A liquidator will be found to possess apprehended bias where a "fair-minded lay observer" would reasonably consider that the liquidator is unable to make a decision required of them with an impartial mind.

To put forward such an allegation, the factors that may lead to a liquidator making a decision that is based on more than the legal and factual merits before them must first be identified.

The party alleging the bias will then have the onus of proving the connection between these factors and the anticipated aberration from the decision that would have been made had it been based solely on the legal and factual merits.

By way of example, it has been observed that it is “generally undesirable” for the liquidator to retain the same solicitors as a substantial creditor, however that is not “an absolute rule” and whether such an arrangement offends the requirement for independence of the liquidator will depend upon the circumstances: In the matter of Ji Woo International Education Centre Pty Ltd (2019) 134 ACSR 448.

Summary

Whether an individual is eligible to act as a liquidator of a company is determined by the Corporations Act and common law principles relating to independence and impartiality.

An actual conflict of interest or existence of bias does not have to be demonstrated; the reasonable perception of an absence of impartiality can be enough to prevent a liquidator from being appointed, or cause a liquidator to be removed from their position.