On 7 December 2011, the Supreme Court of New South Wales (Court) delivered its decision in In the matter of Nugisi Pty Ltd [2011] NSWSC 1512, clarifying the circumstances in which courts will allow the appointment of a provisional liquidator.

Facts

The third defendant in the principal litigation (PPH) operated a private hospital.  PPH was wholly owned by Nugisi Pty Ltd (Nugisi), a holding company.  Nugisi, in turn, was wholly owned, in equal shares, by the plaintiff company (Drummoyne) and the first defendant (MHS).  The controller of Drummoyne (Landa) and MHS’s chief executive officer (Wenkart) were the directors of both Nugisi and PPH.

The principal litigation concerned a dispute between Landa and Wenkart over the supply of IT services to PPH (Dispute).  Because of the Dispute, PPH’s IT services were offline for 10 days (Outage).  During the Outage, PPH received a letter expressing concern from the Ministry of Health (Ministry).  However, PPH’s hospital continued functioning despite the Outage.

The Dispute also caused a breakdown in Landa and Wenkart’s relationship. Consequently, Drummoyne sought, in the principal litigation, orders for the winding up of Nugisi or, alternatively, for Drummoyne or MHS to purchase the other’s shares in Nugisi.

In this interlocutory matter, Drummoyne sought an order appointing a provisional liquidator to Nugisi.

Decision

The Court declined to grant Drummoyne’s application for the appointment of a provisional liquidator.

The Court emphasised that appointing a provisional liquidator is a “drastic” step, which will only be taken where the applicant has good prospects of obtaining a winding up order and the relevant company’s assets face an “imminent threat”. The key issue here was whether an imminent threat existed to Nugisi’s assets – namely, Nugisi’s shares in PPH.

The Outage was insufficient to constitute such a threat, because the hospital had continued functioning and was otherwise profitable.  Similarly, the Ministry’s letter of concern did not threaten loss of licence or any other repercussions against PPH and, thus, posed no imminent threat to Nugisi’s assets. The breakdown in the relationship between Landa and Wenkart was also incapable of constituting an imminent threat to Nugisi’s assets. 

Whilst the Court recognised that the Dispute may have rendered the joint directorship of Landa and Wenkart untenable in the long term, this did not amount to an imminent threat.

Comment

This case demonstrates that courts will be unwilling to appoint a provisional liquidator unless there is an imminent threat to the relevant company’s assets.  The decision shows that this is a high threshold, given the apparently dysfunctional management of PPH and the ongoing Dispute.  Therefore, parties seeking to appoint provisional liquidators should take care to ensure that a sufficiently serious and imminent threat exists before applying for appointment.