TGIF 5 August – Court grants permission to investigate company despite limited expected returns

This week’s TGIF considers Krejci, in the matter of Union Standard International Group Pty Limited (in liq) (No 7) [2022] FCA 890, in which the Federal Court gave liquidators approval to conduct extensive and expensive public examinations despite there being limited expected return to creditors, in part to try and uncover the truth behind $585 million that cannot be accounted for in the company’s dealings.

Key takeaways

• The court may permit liquidators to incur extensive further costs in investigating the affairs of the company in appropriate circumstances.
  
  
• The consent of creditors, or at least, the absence of objection to further investigation incurring costs is a material factor in the exercise of the court’s discretion.
  
  
• Where liquidators are able to convince the court that there are substantial gaps in the information provided or there is evidence of impropriety, the court may be more easily persuaded to permit the liquidator to incur further costs to investigate possible claims available to the company. 

What happened?

Union Standard International Group Pty Limited (In liq) (USIG) held an Australian Financial Services Licence and operated a financial services business which included giving advice on, and facilitating trading in, derivatives and foreign exchange contracts. USIG entered liquidation and, during the course of their investigations into the company, the Liquidators uncovered two keys issues: 

• USIG’s financial records were unreliable in that they recorded its liabilities to certain classes of clients only partially or not at all; and
  
  
• $585 million is unaccounted for in the company’s affairs.

The application

In this application, the Liquidators approached the Court pursuant to section 90-15(1) of Schedule 2 – Insolvency Practice Rules (Corporations) 2016 (IPS) to the Corporations Act 2001 (Cth), to confirm that they are justified in paying their remuneration in connection with the proposed public examinations out of the funds of USIG.

The court’s power in IPS section 90-15(1) is a broad one: ‘The Court may make such orders as it thinks fit in relation to the external administration of a company’. The section contains a non-exhaustive list of options available to the court including to make an order relating to costs of an action taken by a liquidator or remuneration paid to the liquidator.

The Liquidators’ application was unopposed.

Result and reasoning

In the circumstances, her Honour determined it was appropriate for the Court to make orders which would permit the Liquidators to conduct the public examinations and recover their costs against the assets of USIG.

This decision was based on several factors including that: 

• the present return to creditors was described as de minimis;
  
  
• there have been a substantial number of formal proofs of debt;
  
  
• the Liquidators have made numerous applications to the Court and are still of the view that their investigations are being hampered by actions of related companies and persons;
  
  
• initial investigations have revealed serious questions about the workings of the company and its dealings with related and third parties;
  
  
• creditors have been notified of the proposed examinations, and none have objected; and
  
  
• the committee of inspection, formed of various classes of creditor representatives, expressed support for the proposed examinations and their expeditious conduct.

While the examinations as proposed by the liquidators are extensive and expected to cost in excess of $1 million (plus GST), the Court was content that they were necessary to enable the Liquidators to make further inquiries and obtain documents that may ultimately lead to claims and recoveries being made. This was determined to be in the best interests of creditors, particularly in light of the complexity of the company’s dealings, the obstructionism faced by the liquidators in the course of their investigation and the open question of the unexplained $585 million dollars that is unaccounted for in the dealings of the company.

Comment

This decision is another example of the breadth of a court’s powers to manage the conduct of external administrations. Key factors in the exercise of this power are the interests of creditors as a whole, the absence of objection from creditors to the proposed course of action and the considered approach taken by liquidators in weighing up the benefit of incurring substantial further costs in the interests of improving the return to creditors. 

Parties acting in the role of external administrators or liquidators should take comfort that the power of the court is available to facilitate more creative or less obvious steps being taken provided the risk profile is appropriate and the interest of creditors is front of mind.