TGIF 13 May 2022 - Court dismisses bid to restrain liquidators’ choice of representation

This week’s TGIF considers the recent Queensland Supreme Court decision in CGS Constructions (Qld) Pty Ltd [2022] QSC 28 where it dismissed an application to restrain liquidators from engaging the same solicitors as a major creditor to conduct public examinations.

Key Takeaways

• Restraining a litigant’s choice of representation is a decision which is exercised with extreme caution and will not be exercised lightly.
  
  
• Acting for both a creditor and the liquidator will not necessarily give rise to a conflict of interest but specific regard must be given to the factual circumstances surrounding the engagement.
  
  
• To restrain a litigant from engaging their desired representation, a court must conclude that a fair-minded, reasonably informed observer would perceive that allowing the engagement would be against the administration of justice.  

What happened?

In October of 2020, Mr McLeod and Mr Karageozis (Liquidators) were appointed as liquidators of CGS Constructions (Qld) Pty Ltd (Company).

The other relevant parties were Mr Flint, who was the Company’s sole director and secretary, and Mr Harris, the former accountant of the Company.

In December 2020, the Liquidators provided a report to the creditors pursuant to section 70-40 of the Insolvency Practice Rules (Corporations) 2016 (Cth). This report identified numerous issues requiring further investigation. However, the Liquidators were without funding and sought external funding from creditors in order to proceed with proposed public examinations, including of Mr Flint and Mr Harris.

In April 2021, the Liquidators provided a further report to creditors which advised that Union Share Pty Ltd (Union), “a proven creditor in the Liquidation", had expressed interest in providing funding in respect of the foreshadowed public examinations.

Mr Flint’s lawyers wrote to the Liquidators shortly thereafter raising concerns about Union funding the examinations, calling it an “abuse of process” offered with an “ulterior motive”. This was in reference to a separate dispute between the director of Union, Mr Chen, and Mr Flint.  

Meeting of Creditors

In May 2021, the Liquidators informed creditors of the Company that funding from Union was conditional upon Union’s solicitors (Cornwalls Lawyers) being engaged for the purposes of the public examinations but otherwise on terms that were perceived as better than standard external litigation funding.

One of the Liquidators used his casting vote to pass a resolution authorising entry into the funding agreement with Union and, after giving creditors an opportunity to object or apply to the Court to challenge the agreement, it was executed on 14 June 2021.  

Not long thereafter, the Liquidators served examination summonses on Mr Flint and Mr Harris. Mr Flint and Mr Harris then filed proceedings seeking an injunction to restrain the Liquidators from engaging Cornwalls as contemplated by the funding deed.

Decision

Bowskill J ultimately dismissed the application by applying a test of whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice required the solicitor be restrained from acting on behalf of the Liquidators. Her Honour noted the power to restrain a solicitor from acting for a litigant is an exceptional step and should be exercised with caution.

Against this background, Her Honour rejected arguments by Mr Flint and Mr Harris that the Liquidators, by engaging Cornwalls, had manifested a tendency to favour certain interests at the expense of others. The respondents argued this, citing the long acrimonious history between Mr Chen of Union, represented by Cornwalls, and Mr Flint.

Her Honour also rejected an argument that Cornwalls would be, to a reasonable observer, firmly in ‘Union’s camp’ during the course of the examination.

Her Honour was not persuaded that a fair-minded, reasonably informed observer would:

• view the acrimonious history of the parties and conclude it would compromise the Liquidators’ independence to an unacceptable degree; and
  
  
• conclude the proper administration of justice would require Cornwalls be prevented from acting for the Liquidators.

Her Honour also observed that the purpose of a public examination is to gather information, which is to the potential benefit of all creditors, not merely the funding creditor.

Critically, Her Honour found that the interests of Union were not in conflict with the interests of any other creditor; to the contrary, Union’s interests were aligned with other creditors.

Her Honour also concluded that it was not material that Union’s preparedness to fund the public examination was motivated by its interest to recover debts owed to it.

Her Honour also considered the following in rejecting the application:

• that it was not a conflict that one of the Liquidators had voted in favour of the funding agreement given his honest belief that it was in the best interests of the creditors;
  
  
• without the funding from Union, the Liquidators would not have been funded to conduct the public examinations; and
  
  
• other creditors were given a reasonable opportunity to object, and to take action to prevent the deed from being entered into, if they wished, but did not.

Comment

This decision highlights the issues that can arise in an external administration process, particularly where there is acrimony amongst interested stakeholders.

While Liquidators and solicitors need to be ever vigilant as to their professional duties and ensure that conflicts of interest do not arise, a Liquidator engaging the same solicitors as an unsecured creditor will not, of itself, constitute a conflict of interest in which a court will intervene.