TGIF 23 August 2019: Constructing viable claims: when will a special purpose liquidator be necessary?

This week’s TGIF considers the circumstances in which a special purpose liquidator will be appointed to investigate claims the liquidator has already determined are ‘not viable’ in the decision in Williams & Kersten Pty Ltd v Walton Constructions (Qld) Pty Ltd (in liq), in the matter of Walton Constructions (Qld) Pty Ltd (in liq) [2019] FCA 1201.

Background

Walton Construction (Qld) Pty Ltd (in liq) and Walton Construction Pty Ltd (in liq) were part of a corporate group controlled by director Craig Walton.  The group provided construction services.  

The group’s bank provided performance guarantees on behalf of companies within the group in favour of principals under various building contracts. The bank had security to support those bank guarantees, but in April 2013 at least some of the entities in the group were insolvent and the value of the security did not cover the bank’s exposure.

At this time, the director and some of the companies in the group engaged the services of Mawson Restructure and Workouts Pty Ltd (Mawson) to assist it in restructuring and dealing with creditors.  Mawson received substantial fees, including success fees, for its advice and services.  Entities related to Mawson even acquired assets of Walton Qld and Walton Constructions.   From April to September 2013, through the services provided by Mawson, the exposure of the bank was substantially reduced, which had the effect of relieving the director of his liability under personal guarantees.

In a previous decision of Derrington J in McCann, in the matter of Walton Construction (Qld) Pty Ltd (in liq) v QHT Investments Pty Ltd [2018] FCA 1986 it was said that the ‘restructuring services provided by Mawson were for the purposes of advancing the interests of the bank and limiting the exposure of the director’.

Administrators were appointed to the companies in October 2013 and they were placed into liquidation in November 2013.  

The application

The present application was brought by an unsecured creditor of each of Walton Qld and Walton Constructions under s 90-15 of the Insolvency Practice Schedule (Corporations).  The creditors sought the appointment of a special purpose liquidator to investigate and, if appropriate, to bring proceedings to recover damages or compensation from the director for his alleged involvement in two schemes in breach of his director’s duties and from the group’s bank for its alleged involvement in the schemes.

The identified schemes were summarised by Reeves J as involving:

1. replacing bank guarantees totalling between $5m and $7m, issued by the bank to principals on various construction projects with surety bonds issued by Assetinsure Pty Ltd; and
   
   
2. a restructuring under which various assets, including a debt of $18.8m owed by Walton Construction to Walton Qld, being transferred to entities related to Mawson.

The creditors asserted that these two schemes had a serious impact on them in that they diverted funds away from the companies (and into the hands of the bank) that might otherwise have been used to pay unsecured creditors and that the ‘restructure’ kept the companies operating and incurring additional unsecured debts which would not otherwise have been incurred. Derrington J’s earlier decision found that the companies had been insolvent since at least April 2013.

Interestingly, the liquidators had already investigated whether any cause of action arose in favour of the companies in relation to these matters and had obtained legal advice from two sets of lawyers on that question.  Ultimately, the liquidators determined that no ‘viable claim’ existed and that, in any event, they did not have funds to pursue such claims.  The creditors were not critical of the actions of the liquidators.

The unsecured creditors had standing to make this application pursuant to s 90-20(1)(a) of the Schedule as ‘a person having a financial interest in the external administration of the company’.

The outcome

The creditors said that the appointment of a SPL would be ‘just and of sufficient utility to the external administration’ on a range of grounds.  The Court agreed, having particular regard to:

1. The matters to be investigated were ‘substantial and serious’ and the collapse of the group left over $70m in unsecured debts;
   
   
2. The bank had the means to satisfy any judgment that may be entered against it;
   
   
3. The appointment of a SPL would enable unsecured creditors to obtain a ‘second opinion’ about the viability of any claim;
   
   
4. The ‘second opinion’ would involve the SPL, new legal advisers and any litigation funder providing a different perspective from that of the liquidators; and
   
   
5. The public interest factors in pursuing these types of claims, particularly insolvent trading claims against directors.

Orders were made for the appointment of a SPL for the limited purpose of conducting investigations into the schemes without interfering with or prejudicing the work of the liquidators.  The SPL’s costs are to be paid only from assets of the companies recovered by the SPL, not those available to the body of unsecured creditors generally.

Comment

This decision indicates an increasing appetite from the courts to facilitate the appointment of a SPL to undertake further investigations where the amounts involved, severity of the conduct or public interest value justify the additional costs and delay in finalising the liquidation.