TGIF 21 March 2025 – Courts won’t avoid provisional appointments where a company is solvent

In a recent decision of the Federal Court of Australia (Krejci (liquidator) v Panella, in the matter of Richmond Lifts Pty Ltd (in liq) [2025] FCA 151), Justice Cheeseman upheld orders appointing provisional liquidators and receivers to several solvent companies. The case is an important reminder that the Court is willing to intervene in a solvent company’s affairs where the circumstances are sufficiently serious.

Key takeaways

• While the appointment of external administrators is a drastic remedy, the court will not shy away from exercising its discretion to make appointments where the circumstances warrant intervention.
  
  
• While solvency of a company generally weighs against the appointment of external administrators, companies, liquidators and creditors should remember that solvency alone does not preclude the appointment of provisional external administrators.
  
  
• When weighing up appointment of provisional external administrators, the Court considers a number of factors including the least intrusive mechanism for investigating and preserving the company’s assets to protect the interests of creditors.

Background to the Federal Court decision

The liquidator of several plaintiff companies (the Liquidator) succeeded in obtaining urgent ex parte orders appointing provisional liquidators and receivers to some of the defendant companies and freezing some assets. These orders were obtained in advance of the substantive hearing, which included alleged tax avoidance schemes and the diversion of monies from the Deputy Commissioner of Taxation to the defendants.

In obtaining the ex parte orders, the Liquidator did not allege the companies should ultimately be wound up because they were insolvent. Rather, the liquidator relied on just and equitable grounds.

The defendants (and two non-parties) urgently applied to set aside the orders appointing the provisional liquidators and receivers and the freezing of assets. At the hearing, the challenge to the freezing orders ultimately fell away.

In challenging the appointments, the defendants relied on evidence supporting the solvency of the companies. However, as the Liquidator did not seek to wind up the companies on the basis of insolvency, and considering the limited time available to hear the urgent application, her Honour proceeded on the assumption that the companies were solvent in assessing whether the orders should be set aside.

Although the application was made by the defendants, the Liquidator bore the onus of satisfying the Court that the orders should continue (since they were originally made in the absence of the defendants).

When will a court appoint a provisional liquidator to a solvent company?

Pursuant to section 472(2) of the Corporations Act 2001 (Cth) (the Corporations Act) a Court may appoint a provisional liquidator ‘at any time after the filing of a winding up application and before the making of a winding up order’.

As the appointment of a provisional liquidator is a drastic remedy and a serious intrusion into the affairs of a company, the Court will order the appointment of a provisional liquidator where it is satisfied that:

• there are good prospects of a winding up order being made; and
  
  
• the assets of the company are in jeopardy of being dissipated and should be protected in the interim.

Were there good prospects of obtaining a winding up order?

Her Honour concluded that there were good prospects that the relevant companies would be wound up on just and equitable grounds, considering:

• the appearance that the relevant companies were under the control of a shadow director;
  
  
• a justifiable lack of confidence in the management of the companies’ affairs, given the evidence of serious and ongoing breaches of the Corporations Act;
  
  
• the absence of evidence regarding the reasons for payments made by the plaintiff companies to the relevant defendant companies, over which the provisional liquidators were appointed; and
  
  
• the likelihood of the companies being wound up increasing if the plaintiff companies ultimately established a tax avoidance scheme.

Were the assets of the impugned companies in jeopardy?

Her Honour concluded there was a real risk of the distribution and dissipation of assets of the relevant companies. In particular, her Honour placed weight on:

• the dishonest nature of the conduct alleged;
  
  
• the steps taken by some defendants following examinations to seemingly insulate themselves from external investigation (including the appointment of voluntary administrators and entry into a Deed of Company Arrangement with related parties);
  
  
• an interaction observed by independent solicitors where the shadow director’s comments indicated some awareness of suspicious dealings; and
  
  
• evidence of the ongoing failure of the relevant defendants to provide information and documents.

Did the balance of convenience favour appointing provisional liquidators?

Her Honour was satisfied that the balance of convenience weighed in favour of appointing the provisional liquidators. In reaching this conclusion, her Honour:

• weighed the factors in favour of appointing a provisional liquidator (including the prospects of success and the need to preserve assets), against the drastic nature of the appointment. This included the impacts on the business and any reputational damage;
  
  
• considered that the business risks were not persuasive or could otherwise be managed (insofar as a provisional liquidator’s duty encompasses continuing trade in any legitimate business);
  
  
• considered that the need to protect, preserve and investigate the position of the relevant companies favoured the provisional appointment; and
  
  
• considered that there was no lesser form of relief that would adequately protect the plaintiff companies as creditors at that time.

When will a Court appoint an interim receiver?

Although the appointment of an interim receiver is also considered a severe remedy, the Court may appoint an interim receiver where:

• a civil proceeding has been commenced under the Corporations Act;
  
  
• the Court considers it necessary or desirable to protect the interests of persons who may have a claim. This requires the Court to undertake a risk assessment, by reference to the interests to be protected and threats to those interests; and
  
  
• a lesser remedy is inadequate.

The risk assessment

In undertaking the risk assessment, her Honour considered:

• the evidence of the existence of a shadow directorship, including by reference to payments in excess of $2.5 million from the relevant company to the shadow director;
  
  
• that evidence in respect of the impugned company appeared to come primarily from the shadow director;
  
  
• the lack of compliance with demands for documents and a refusal to allow the Liquidator access to the business premises to recover books and records; and
  
  
• that there was a reasonable basis for the claims made against the company.

Her Honour accepted that unlike the other companies where provisional liquidators had been appointed, this company appeared to have a functioning accounting business distinct from the alleged schemes. For that reason, the appointment of interim receivers (as opposed to provisional liquidators) was considered to be the least intrusive mechanism for investigating and preserving the company’s assets to protect the interests of the plaintiff creditors.

Comment

The case is a reminder that the Court will not shy away from exercising its discretion to appoint provisional liquidators and interim receivers where the circumstances are sufficiently serious, and where it is considered necessary to preserve assets and protect creditors.

While it is unusual for a solvent company to be wound up, solvency does not preclude provisional appointments of external administrators. The Court will have regard to various factors including weighing the risk to the impacted businesses and creditors.

The case stresses the challenges of meeting the evidentiary burden in urgent applications. It also highlights the likelihood of the Court adopting a pragmatic approach in considering the overarching purpose when exercising its discretion.