Demands by liquidators – trying their luck, or “no ifs, buts or maybes”?

If anyone receives a letter from a liquidator of a company requesting, or demanding, important information, or payment of a sum owing, the recipient should be able to make an assumption that given the position and status of liquidators (and trustees in bankruptcy, both as registered insolvency practitioners), that there is legal and factual substance behind the demand.

Indeed, depending on what is asked, the recipient should expect the practitioner to set out the legal basis of the demand, and the relevant section of the law, as to why the recipient should respond.  Properly, the practitioner should at the same time ask the recipient if they have any defence or answer to the demand, or reason not to respond or pay.  In some cases, the practitioner’s letter should suggest the recipient take some legal advice.

Making a demand, say for payment, is valid.  It accords with the obligation of a practitioner to make an attempt at resolution of the claim without litigation. Depending on the basis of the demand, and what is explains, payment might well be forthcoming.

A demand is also necessary for setting the date from which pre-judgment interest might be claimed if orders are eventually made in favour of the liquidator: see Grace Fashion Pty Limited (in liq) v Miss Cherry Fashion Pty Ltd [2017] FCA 662. 

So a demand is a serious document for an insolvency practitioner to send.

Recent case

In a recent decision, the Judge considered that a liquidator had adopted a practice of sending out letters making without adequate substantiation. The letters went to those who were involved with the company, mainly as creditors. The Judge set out the part of the cross-examination of the liquidator who was asked, among other questions,

“so his Honour should read your demands as a simple [try on] and you had no faith in those demands but you just send them out for good luck. Is that the case?” 

The Judge said:

“A liquidator holds an important statutory office. It is a matter of concern that any liquidator would make demands of third parties for the recovery of monies when the liquidator did not have, at the time the demand was made, a proper basis for making that demand. Notwithstanding that [the liquidator] was motivated by the laudable motive of seeking to maximise the recovery of monies for creditors, this is insufficient to justify demands being made in the hope that a third party will effectively accept the demand as a ‘fair cop’. If this is a common practice then, in my view, it should be deprecated. A demand should only be made by a liquidator if the liquidator believes, on reasonable grounds, that there is a proper legal and factual basis to make such a demand”.

Other issues were raised by the Judge, all in the context of an application by the liquidator for an extension of time under s 588FF(3) of the Corporations Act to bring voidable transaction proceedings. A short extension was granted: see Parker, in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687.

On the other hand

At the same time, insolvency practitioners do have authority to demand moneys owing and to take hold of the property of the company and they can exercise their powers strongly. They may be criticised if they allow moneys or assets of the company to be stolen through delay or lack of forcefulness in demanding possession.

It was former Justice Peter Heerey who in a 1993 case described the “quite reasonable and restrained” demands of a provisional liquidator, who was obliged by the law

“to take possession of goods and chattels belonging to the company; no ifs, no buts, no maybes”. 

There was not, in that case, any dispute that the company owned the assets. 

As he said:

“Obstructing the provisional liquidator in his attempts to perform this clear duty amounted to a serious interference with the discharge of his obligations”.

See Emerald Properties Pty Limited v Chan and others [1993] FCA 615. 

Grey areas

There can be grey areas whether money is owing, or that a transaction can be challenged, or that property is that of the company.  This comes down to whether the practitioner “believes, on reasonable grounds, that there is a proper legal and factual basis to make such a demand”. That may call for legal advice in some cases, but at least a close examination of the information available and law involved.

Reissued, July 2018.

 

 

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