In the recent decision of ASIC v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 (ActiveSuper), the Federal Court considered an application by ASIC brought pursuant to s 472(2) of the Corporations Act 2001 (Cth) (Act) to appoint provisional liquidators to a company MOGS Pty Ltd (MOGS). The decision confirms the wide discretion of the court and provides a helpful distillation of the principles governing the appointment of provisional liquidators.

BACKGROUND

ASIC brought the application against MOGS to secure and preserve its assets pending the final hearing and determination of the winding up application and to empower an independent expert and officer of the Court to investigate MOGS’ affairs and report back to the Court. ASIC relied on five grounds to justify the appointment of a provisional liquidator:

  1. in excess of $4 million raised from Australian investors and paid to MOGS appeared to have been dissipated;
  2. MOGS engaged in transactions with no apparent commercial purpose;
  3. MOGS contravened the law, including by keeping inadequate accounts and records;
  4. the information provided by one of the directors (Mrs Gore) lacked veracity; and
  5. MOGS appeared to be insolvent.

THE LEGISLATION

Section 472(2) of the Act gives the Court power 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.

THE PRINCIPLES

Gordon J espouses a number of relevant legal principles in relation to the appointment of provisional liquidators. Her Honour’s starting point is that the Court has a wide and complete discretion. This discretion is tempered by the well-established consideration that the appointment of a provisional liquidator is a drastic intrusion into the affairs of the company and will not be done if other measures would be adequate to preserve the status quo. Consequently, the applicant must show good reason for the intervention.

Her Honour sets out six well-established principles concerning the appointment of a provisional liquidator:

  1. whether there is a reasonable prospect that a winding up order will be made;
  2. whether the assets of the company are at risk;
  3. the degree of urgency;
  4. the need for an independent examination of the state of the accounts of the corporation;
  5. whether the affairs of the company have been carried out casually and without due regard to the legal requirements so as to leave the court with no confidence that the company’s affairs are being properly conducted; and
  6. the need to preserve the status quo so to ensure the least possible harm to all concerned.

MOGS’ failure to provide satisfactory answers to direct questions about its current status raised the suspicion of the Court. This failure was considered in light of the fact that MOGS was apparently engaged in large continuing commercial transactions with what may well have been wholly innocent third parties.

Gordon J found that there was a reasonable prospect that a justifiable lack of confidence in the conduct and management of MOGS, and a case for winding up of MOGS would be made out at trial and exercised the court’s discretion to appoint a provisional liquidator.

COMMENT

This case clarifies the principles a court will take into account when exercising its discretion to appoint provisional liquidators. While courts are reluctant to interfere with the affairs of companies, sometimes it is necessary in order to preserve the status quo and protect the public interest.