TGIF 26 July 2019: Removal Refusal: New South Wales Supreme Court refuses an application to remove liquidators

This week’s TGIF considers a recent application for removal of liquidators where creditors argued that the liquidators had not properly discharged their duties and were not independent.

Background

On 18 April 2019, FW Projects Pty Ltd (the Company) was placed in a creditors’ voluntary liquidation by a resolution of its members.  Messrs Devine and Morelli (the Liquidators) were appointed as the liquidators of the Company.  

Approximately one month later, two of the Company’s creditors (the Plaintiffs) applied to the Court seeking the removal of the Liquidators and other orders

Issues 

The Plaintiffs argued the Liquidators should be removed for various reasons, including:

1. failing to investigate matters concerning the validity of the security held by a purported secured creditor of the company;
2. failing to act independently – by having pre-appointment discussions with the purported secured creditor, including about funding of the Liquidators’ initial remuneration;
3. failing to act independently – by engaging the same lawyers who had acted for the Company and who were a substantial creditor in the liquidation.

Findings

The Court held that the Liquidators should not be removed.  The Plaintiff’s main arguments were dealt with as follows:

Failure to investigate

The Court concluded that the Liquidators could not reasonably have been expected to have substantially progressed an investigation in the time they had been afforded. The Liquidators had only been appointed for four weeks when the Plaintiffs first expressed concern about the security arrangements. The Plaintiffs then only allowed four further days before filing proceedings. By the time the Court delivered judgment, the Liquidators had been in office for approximately three months.

In this three month period, the Liquidators had been endeavouring to respond to voluminous and wide-ranging information requests by the Plaintiffs.

These matters, coupled with the fact that:

• the Liquidators were unfunded;
• the issues concerning the security arrangements were extensive and complex;
• the Liquidators had committed to funding an investigation into the security arrangements with the support of newly appointed independent solicitors; and
• the Plaintiffs were intending to file proceedings themselves to have the security arrangements set aside,

meant that the Court was unpersuaded that the Liquidators had failed to carry out proper investigations.

Failure to act independently – pre-appointment discussions with secured creditor 

The Liquidators had pre-appointment discussions with the secured creditor, which included the secured creditor providing an undertaking to allow the Liquidators to apply $100,000 from the sale of secured property in payment of their costs and expenses.

The Plaintiffs made numerous criticisms about the Liquidators’ conduct, which were broadly to the effect that the Liquidators had preferred the interests of the secured creditor over and above the other creditors. According to the Plaintiffs, this involved the Liquidators accepting the validity of the security arrangements without proper investigation.

The Court rejected the Plaintiffs’ complaints. The Court found that the pre-appointment discussions were of a preliminary character only and it could not be said that those discussions were likely to impede or inhibit the Liquidators from acting impartially in the interests of all creditors. Further, the Liquidators’ attempt to secure funding from the sale of secured property was justified (any liquidator dealing with secured property may be dependent upon creditor consent to access the property for funding) and did not involve any acceptance by the Liquidators that secured creditor did in fact have valid security.  

Failure to act independently - Use of the Company’s lawyers 

The Liquidators engaged the lawyers who had acted for the Company prior to liquidation. Those lawyers were themselves a substantial creditor in the liquidation and had been involved in the drafting of the security agreements which the Plaintiffs were challenging.

The Court acknowledged that the Liquidators were faced with a difficult decision. On the one hand, the Liquidators had little access to funding and the lawyers were already familiar with the Company’s affairs, had access to relevant documents and were prepared to act without requiring immediate payment of their fees. However, on the other hand, the fact that the lawyers were substantial creditors and had been substantially involved in advising the Company on transactions that would likely require investigation by the Liquidators, posed a risk to the lawyers’ objectivity.  

The Court held that, while engaging independent lawyers from the outset would have been preferable, the Liquidators’ failure to do so was not a sufficient reason to have them removed, especially where the Liquidators had committed to engage new lawyers from the delivery of the Court’s judgment.

Key Messages

The Court referred to the decision of Re St Gregory’s Armenian School (in liq) [2012] NSWSC 1215 where Brereton J said that the onus of showing cause for removal of a liquidator is not “lightly discharged” and that:

“… it should not be seen to be easy to remove a liquidator merely because it can be shown that in one or possibly even more respects, his or her conduct has fallen short of the ideal.”

It therefore remains a relatively high bar to remove a liquidator. As this case shows, something more than a liquidator having pre-appointment communications with a secured creditor, or engaging the insolvent company’s former lawyers, will be required.

A case-by-case assessment is necessary and liquidators need to be vigilant at all times to ensure that their independence is preserved.