Special purpose liquidators – merely a creditor’s whim?

Insolvency law has a mixed view of its liquidators.  On the one hand they are said to be of the highest integrity, qualified and experienced, officers of the court, exercising quasi-judicial authority, investigating misconduct and pursuing public interest issues.  

On the other, they are seen as being susceptible to bias in favour of the many influences upon them as business people – that they will overcharge, act in favour of whoever has appointed them, spend available money on themselves, or otherwise pursue their own interests.

This has become apparent in situations where special purpose liquidators (SPLs) are appointed by the Court. Initially such appointments were made where circumstances of some discrete conflict of interest arose for the original liquidator, necessitating a separate liquidator for the “special purpose” of that conflict issue.  

This has developed into a practice of appointing an SPL at the behest of a particular creditor who, on one view, is permitted to claim it is unduly suspicious of the liquidator because that person was appointed by directors, as the law allows and indeed encourages.  On that view, that particular creditor can hold the administration to ransom in demanding a replacement on its terms.  

Victoria v State Administration Services

Victoria’s Department of Education and Training (‘DET’) has had SPLs appointed to certain education and training organizations which received subsidies from the Victorian government. The companies were in voluntary liquidation, the directors having approached and appointed two liquidators – Liquidators – from Jirsch Sutherland.

However DET wanted its own liquidators and sought orders for the appointment of practitioners from Ernst & Young (‘EY’) as SPLs. The “special purpose” was to investigate the lost funding of DET and pursue recoveries.  Only if EY were appointed would DET provide an indemnity for investigations and litigation to be undertaken.  The Liquidators had insufficient funds to carry them out.

The Judge agreed that significant investigations were needed and noted that DET was only willing to fund them if the SPLs were appointed.

“That is, in part, because the Liquidators … were selected by the directors and/or solicitors for [the companies], their appointments having resulted from referrals by” the solicitor for those companies.

Some better explanation followed from the Judge, that DET would prefer the SPLs because one had some familiarity with the affairs of the companies, and had “experience in the type of investigations that are necessary in the present case”. It also assisted that the two administrations — by the existing Liquidators and the SPLs — were financially independent of one another.

The Judge concluded that it was “just and beneficial to appoint the SPLs”, he being satisfied that investigations “would not take place if the SPLs were not appointed and suitably indemnified”. See State of Victoria v Goulburn Administration Services (in liq) & Ors [2016] VSC 654.

Comment

The decision is best seen as one where SPLs were appointed because they had some background in the particular industry, beyond that of the appointed liquidators, and had the confidence of the funding creditor. There was a discrete area to be investigated, in a significant matter of public interest.

The decision should not be seen as accepting that a liquidator chosen and appointed by the directors is a ground in itself to replace a liquidator, or appoint an SPL.

However that is how the law sees it.  A liquidator or administrator appointed by the directors can be replaced by a vote at a creditors’ meeting.  No reason need be given. An immediate perception of bias seems to be accepted. Under the insolvency law changes coming into place in 2017, the creditors will be able to replace a liquidator at any time for any reason.  

If the appointment of a liquidator by directors is inherently seen as suspicious, then the system seems wrong, and should be changed.  Other options are available, but they present their own problems.

This is not a question of perceived lack of independence.  It appears to be based on what is perhaps a reality that a person’s perception of bias is inherently activated when they know that if X has some friendly or business connection with Y, then X will inherently favour Y, perhaps without being conscious of that.  

In a different but related context, the High Court has described a person who is both investigating and prosecuting an offence as having a personal interest in the “vindication of their opinion that an offence has occurred … or in obtaining an outcome consonant with [their] view of guilt or punishment”.  That is the case even though the person acted honourably and professionally.  The High Court said it was not necessary to analyse the psychological processes involved; it was enough to conclude that the person’s dual role would not enable them to bring the requisite impartiality to decision-making: Isbester v Knox City Council [2015] HCA 25.

To some extent the law’s assumption is that liquidators have that dual or separate focus – if directors appoint a liquidator, creditors may reasonably assume that the liquidator has a personal interest in looking after the directors given that they have in effect provided the liquidator with a remunerative job.    

That seems to be the reason for creditors to being able to immediate remove a liquidator early on, soon after the directors have appointed. This is so even though the liquidator is independent and in many cases will pursue the directors for money or report them for offences.

But now, under the 2017 law changes, creditors may change liquidators at any time, for any reason.  That may be for legitimate reasons, that the creditors consider another liquidator would bring more expertise or resources to the role.

That right of creditors will inherently swing the perceived behaviour of the liquidator from the directors to the creditors. That may be seen as valid.

But there are creditors and creditors, some with greater voting influence, and funding power, than others. Does this lead to a perceived suspicion that the liquidator will act more in their favour, admit their proofs of debt more readily for voting purposes, or pursue their funded proceedings without question?

That in itself presents the problem that while creditors individually are important, the liquidator has to act in the interest of all creditors, and beyond.  The laws says that creditors cannot ultimately tell the liquidator what to do.  But in reality, creditors can do more – they can replace the liquidator. 

This explanation is moving off into aspects of human behaviour, whether that be of a judge, liquidator or government decision maker.

In the end, as cases on natural justice and independence accept, there has to be some compromise of attention to these conflicts. The reasonable fair minded observer is the test. In relation to the appointment of liquidators by directors, that observer should be assessed as accepting that, for better or worse, this is how the law works, and that no assumed suspicion should be allowed to prevail.  

Judges, and regulators, and the law might be better supporting that fair minded approach rather than so readily accepting the opposite.

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