If there is little money in the winding up, the liquidator will have to cut corners he might not otherwise cut

Insolvency practitioners have the choice to take on a liquidation or a bankruptcy and therefore must accept that there will be occasions when they will be unremunerated for necessary work. It goes with the job.  The question is to what degree. What work, if any, has to be done to prepare and lodge a section 533 report, or a new section 70-30 report?

Section 545 of the Corporations Act is a beneficial provision, providing that a liquidator is not liable to ‘incur any expense’ in relation to the winding up of a company unless there is sufficient available property from which their expense will be repaid.

Section 545(3) goes on to say that this does not “relieve a liquidator of any obligation to lodge a document (including a report) with ASIC under any provision of this Act by reason only that he or she would be required to incur expense in order to perform that obligation”.

Section 545(2) then allows a liquidator to be directed to incur a particular expense if paid for doing so.   

The section is unsatisfactory in its drafting.  Like many provisions in our insolvency laws, the wording dates back over a century.  

The section is often linked to the requirement of a liquidator to lodge a report with ASIC on breaches of the law, for example under s 533 Corporations Act.  While this lodgment obligation is clear, how much work, if any, has to be done in investigating matters to allow that report to be done, in light of s 545?

Precursor to s 545

The precursor to s 545(3) was s 429(3) of the Companies (NSW) Code. It said that nothing in s 429(1) shall be taken to

“relieve a liquidator of any obligation to make a report under section 418 (the s 533 equivalent) or to lodge a document with the Commission (ASIC) etc”.

There was an obvious change made when the current section 545 replaced s 429, in the 1980s, from making a report to merely lodging a report, although the relevant explanatory memorandum is not helpful. It suggests however a drawing back of the obligation to report offences if there is no money to fund the liquidator.

Expense

A threshold issue is that the meaning of incurring an “expense” is unclear.  The Corporations Act uses the word expense in different ways, the closest definition being “deferred expenses” in s 556, meaning the “remuneration, or fees for services, payable to the liquidator”.  Various other sections refer to the “costs, charges and expenses of winding up the company”: see for example s 515. Under the ILRA 2016, no definition is provided of expenses or the related terms – costs, remuneration, charges – and the various terms are used inconsistently.  This was raised in my submission to Treasury on the draft law in November 2016, without response. 

For now, it might be said that an expense is a disbursement, incurred, for example in engaging legal advice, or paying for ASIC searches.   But it could cover remuneration.

The Courts

The courts in various decisions under s 545 have glossed over the words, but have generally accepted the section as relieving a liquidator from conducting or becoming involved in litigation, or conducting further investigations, or examinations, or paying undue storage fees. As to how the courts view s 545:

• the court in Jenkins v Jonkay said that the section means that “the liquidator commits no wrong in failing to carry out any duties”.
• a more colourful comment in Re Biposo was that
  

  “the situation will often occur that there will be little money in the winding up and the liquidator will have to cut corners that he might not otherwise cut, and the court must be very careful not to impose too strict a duty which would stop that happening.”

• however, in Asden Developments, some work was expected of the liquidator, by way of phone calls, despite a lack of funding; and
• the court in Creative Finance was critical of an unfunded liquidator who, in trying to recover over $9m, sent a single email, but did nothing more, “not even by picking up the phone”, as the Judge said.

Ridley Capital Holdings, Black J

It has not been until December 2016, in ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801, that a court has directly confronted some of the difficulties in the drafting and the intent of  section 545, although in the end without needing to resolve them. 

Justice Black commented that it was by no means clear that either s 545(1) or the authorities that recognise a liquidator’s right to remuneration where assets are available, go so far as to say that a liquidator is not required to undertake work where there are no assets. Though he said that this view had some limited support from the comments in Re Biposo, above.

He noted that s 545(1) “is directed to the incurring of expenses rather than to remuneration”, without further analysis or comment.

An insolvency principle?

But Black J also saw some force in a submission that, even if s 545 does not apply to a liquidator’s time costs, as distinct from expenses,

“the principle it reflects should inform an understanding of the liquidator’s role”.

Unfortunately, the judge thought it not necessary to determine that interesting question in that case.

Nevertheless, under the ILRA, there is an acknowledgement of a principle that work does not have to be done if there are no funds for the practitioner’s remuneration.  This is found in the obligations of a practitioner to respond to “reasonable requests” from creditors and committees.  Under the new law, it is not reasonable if “there is not sufficient available property to comply with the request”.  That may have always been the case but it is now enshrined in the law.  

One might therefore say that insolvency law generally acknowledges that although there are some fundamental duties and obligations of a practitioner that apply despite there being no or not enough funds for remuneration and  expenses, a line has to be drawn beyond which the law does not expect or require the practitioner to go. 

Reporting breaches of the law

As to the question asked earlier, about the obligation under s 533, respected academic opinion from the University of Melbourne is that section 545

“makes it clear that there is no obligation to conduct any investigations beyond the bare minimum required for the” section 533 report.

There is then a question whether a liquidator without funds would be required to investigate beyond the bare minimum for a report to creditors under s 70-30 of the Corporations Rules, applying from 1 September 2017.

While ASIC considers that the obligation to investigate exists regardless of funds, no court decisions have addressed that question.  However there is no general statutory obligation under the Corporations Act of an insolvency appointee to investigate, save that section 438A requires a voluntary administrator to “investigate” the company’s business, property, affairs and financial circumstances, and then form an opinion and then report.  The main ‘investigation’ responsibilities under the Corporations Act, and the ASIC Act, are those imposed on ASIC. 

Under the UK Insolvency Act 1986 the separation between investigating and reporting is clear – the duty being …

“to investigate, if the company has failed, the causes of the failure; and generally, the promotion, formation, business, dealings and affairs of the company, and to make such report (if any) to the court as (the practitioner) thinks fit”.

A broader policy perspective is that insolvency necessarily involves limited funds, and tasks have to be performed proportionately, or commercially, or expediently.   

As to that, it is well accepted that very few corporate offence referrals are pursued by ASIC. If liquidators are without funds, they might be better spending any unpaid time they want to offer on more productive exercises than investigating every breach of Australia’s laws in relation to the company; or, attend to what is required of them, as a form filling exercise, proportionately.  This would assist ASIC in relation to its own obligation to manage its resources “properly”, that is in an “efficient, effective, economical and ethical” manner, under its obligations in the Public Governance, Performance and Accountability Act 2013. 

Comment is invited.

No-one should rely on this as legal advice, indeed get legal advice about anything on this website, and even then, be careful.