While no-one in business likes losing a client or customer, usually, it happens all the time, as a matter of commercial choice.
Insolvency practitioners – IPs, being trustees in bankruptcy and company liquidators – are not your average business operators. They have no clients or customers, are often appointed by a court and they have quasi-judicial powers over creditors.
Nevertheless, the law has always allowed trustees to be removed by creditors at a meeting, and now, as a result of recent law reforms, the law will allow creditors to vote out a company liquidator.
There are limited circumstances where liquidators and administrators can be removed already, for those newly appointed, but creditors will have this power to remove at any time during the course of a company winding up or administration. Rules apply as to the percentage of creditors that will be required to prompt the IP to hold a meeting to conduct the vote, and then to determine if the necessary percentage of votes is achieved.
Some starting points may assist.
- Creditors do not have to give, or indeed have, any reason to remove an IP.
- This is subject to any abuse of process. For example, creditors under investigation by the IP may get the numbers together to vote to remove that IP.
- But subject to abuse of process, the authority of creditors is unlimited. It seems they could vote out liquidator A in favour of liquidator B despite the court having two weeks before decided upon liquidator A over liquidator B when ordering the company be wound up.
- If the vote is evenly split, the liquidator’s casting vote can only be exercised in favour of their own removal
- While an IP may not like being removed, judges have been severe where there is some fudging of the holding of the meeting where the vote is to be taken, including in the calculation of the threshold percentages. This has been so even if the IP has valid concerns about why they are being removed.
- IPs should not over-react to being removed. Professional objectivity should prevail. It may be that the IP is glad to be rid of the administration in any event.
The IP has at least two options:
- To hold the meeting and then respond, as necessary, to the outcome;
- To go to court seeking directions on whether the meeting should really be held, or even to seek an injunction stopping the meeting being held.
As to the first, if the outcome of the meeting is that the IP is removed:
- The law allows the IP to apply to be reinstated but there is some risk of costs unless for good reason;
- There may be an abuse of process but it is not necessarily up to the IP, already removed from office, to do anything, beyond perhaps letting the relevant regulator – ASIC or AFSA – know. Funds available and indemnities from supporting creditors will be relevant;
- If there is no replacement offered, in bankruptcy the Official Trustee becomes the trustee; in corporate insolvency, the liquidator stays until one is found. If not, the liquidator and creditors are stuck in an unhappy relationship.
As to the second, a practitioner can challenge their proposed removal before the meeting but they may be at the risk of costs, or worse. While this proactive approach may be better, the new insolvency law does not directly contemplate it. And an IP who sought directions whether a meeting was necessary was ordered to pay indemnity costs when their obligation to hold the meeting was clear and had substantial creditor support.
As to other risks, Judges have referred to:
- an IP embarking upon an ‘unnecessary investigation under the wrong test’ to determine whether a creditor’s vote should be allowed;
- grounds for review of the IP’s conduct being based on the combination of factors of non-compliance by the IP with a valid request for the convening of a meeting and the major creditor having lost confidence in the IP;
- the “reprehensible conduct” of an IP in fudging on a meeting being held.
Despite the IP’s removal, the law is likely to concede the need for the IP to do work to hand over the estate for which remuneration may be claimed.
However, there are no provisions in the ILRA to divide up the remuneration between IPs in such cases. Section 164 in bankruptcy – which only said that the trustees should agree – is being repealed and not replaced.
Overall, the intent of the law is evident, to increase the authority of creditors, who owe no duty but to themselves, over the IP as an independent fiduciary.
Is it valid to say that IPs should take care to look after their own interests, consistent with the law, and in appropriate cases leave any concerns about abuse of process to those creditors, the regulators, and the courts?
More on this, in Keay’s Insolvency, Bankruptcy Law and Practice, and other of my publications, including those forthcoming.