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Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Independence of debtors’ chosen liquidators

If directors apply to the court have their company wound up in insolvency, or in fact support an application for winding up, should there be any predisposition against appointing their nominated liquidator?

The decision in Avant Garde Investments[1] suggests yes.

Receiver F applied under s 459A of the Corporations Act that the company be wound up in insolvency and that B, the provisional liquidator, be appointed as liquidator.

The directors sought another liquidator, questioning B’s independence.

While on the facts the Judge said there were no issues about a lack of independence, and the receiver’s nominee would best be appointed, 1999 NSW case law[2]Unifor Office Systems – was cited that

‘liquidators should not be chosen by the directors or other principals of the Company. It is considered to be in the interests of creditors that someone entirely independent undertake that role. …’.

This is too broad a statement of the law. Directors almost always ‘choose’ the liquidators in voluntary windings up. Does that impugn the independence of the appointee?

But the Judge continued, agreeing with a submission that

‘the very fact that the director is seeking appointment of other liquidators itself might be such as to give rise to a perception of a lack of impartiality if the liquidators proposed by the director are in fact appointed’, and that was a perception that might be exacerbated by the fact that the director was a defendant to proceedings impugning his conduct’.

The facts are always important in independence decisions and that was the case here, the Court following existing practice of appointing the plaintiff’s nominee, ‘all other things being equal’.

But when a court accepts as a matter of principle that a creditor may lack

‘confidence in the incumbent because he was appointed by the company’,

or that

it is ‘not irrational’ for an unrelated creditor to prefer a liquidator not selected by those behind the company

this serves only to unfairly say that liquidators may or will act at the behest of their appointor, or be reasonably perceived to do so.

In contrast, there are other judicial comments that there is

‘no general practice or principle that the liquidators initially appointed by directors in a creditors’ voluntary winding up cannot continue as liquidators of the company’;[3]

and that

‘it is the norm, in cases where administration matures into creditors voluntary winding up, for the administrator to become the liquidator unless a positive decision to displace him or her is made by creditors’.[4]

Also, courts reject challenges to directors’ appointments of a voluntary administrator simply on the basis that the directors chose that administrator.

The ‘fair-minded observer’ would understand that the system is based upon directors taking an initiative and choosing an external administrator.

As the Court said in Ziziphus,[5] that fair-minded observer

‘would be taken to know that voluntary administrators may be appointed both by the board of directors of the company (under s 436A of the Act) and by a secured creditor (under s 436C of the Act), and that the administrator is required to make a declaration of relevant relationships and indemnities, and provide a copy to creditors (s 436DA of the Act). A fair-minded observer would also be taken to know that the [administrators] were accountants and professional insolvency practitioners in a competitive market [exercising, in this case] competence, expertise and professionalism’.

In any event, the real issues were that B was appointed given his initial appointment as provisional liquidator, the work he had already carried out, his lower hourly rates, and the fact that he had indicated that if appointed liquidator he would pursue investigations and recoveries. He had also retained new lawyers, and no creditor raised any concerns. No reference to any code was required.

Generally

As to whether a receiver may be appointed liquidator, their differing responsibilities will often place them in adversary roles. There are also statutory restrictions under ss 418 and 532. Nevertheless, it is still possible in some situations for a company’s receiver to be appointed by the court as the liquidator or vice versa and it was said to have been a common practice in the past.

‘There can of course be no difficulties when the receiver, having satisfactorily concluded his duties as such, is then appointed liquidator to get in and realise for the benefit of the general body of creditors the remaining assets in the company.’

But this has been described as

“not a good practice if there is a possibility of conflict between responsibilities”.[6]

Finally, the decision referred to for the principle in question, Unifor Office Systems came from a period of time when there was a rotation system for choosing liquidators in court appointed matters in NSW and some other states, a system that the then Trade Practices Commission had earlier found to be anti-competitive[7] and was later removed.

=============================

[1] Frisken, in the matter of Avant Garde Investments Pty Ltd v Cheema [2020] FCA 98

[2] Unifor Office Systems Australia Pty Ltd v Brewer Partnership Pty Ltd [1999] NSWSC 137

[3] FW Projects Pty Limited (in liq) [2019] NSWSC 892

[4] Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 380

[5] Ziziphus Pty Ltd v Pluton Resources Ltd (R&M apptd) (in liq) [2017] WASCA 193 at [92].

[6] Re John Wiper Ltd (1972) 5 SASR 360; (1972)22 FLR 206 at 216: ‘the practice of appointing a receiver to be also liquidator is in my experience a common one in this State …’.

[7] Study of the Professions – Accountancy – July 1992 at 87.

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