TGIF 3 May 2024 - When can liquidators engage professional advisors without court approval?

The Supreme Court of Western Australia has recently delivered judgment in the case of Kitay v Frigger [No 2] [2024] WASC 113. The Court held that some, but not all, long-term costs agreements and retainers entered into by a liquidator required court approval.

Key Takeaways

• Depending on the circumstances, a liquidator may require court approval to enter into a long-term costs agreement or retainer.
  
  
• Court approval will not be required for long-term agreements the liquidator enters into that concern the provision of advice regarding the winding up or performance of the liquidator’s duties.
  
  
• Court approval will be required if the liquidator enters into a long-term agreement as an agent or representative of the company, if the company is a party to the agreement, or if the company takes the benefit of the services to be provided.

Background

On 6 May 2010, the Court made orders for Computer Accounting and Tax Pty Ltd (in liq) (CAT) to be wound up and Mr Mervyn Kitay to be appointed as liquidator. In his capacity as liquidator, Mr Kitay has been party to numerous proceedings commenced by the defendants, Mrs Angela Frigger and Mr Hartmut Frigger, who are directors and members of CAT. In defending those proceedings and winding up CAT, Mr Kitay entered into various costs agreements and retainers for the provision of legal services.

In four separate proceedings, Mr and Mrs Frigger filed applications for summary relief on the basis that Mr Kitay failed to obtain court approval under s 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act) for entry into those costs agreements and retainers.

Section 477 of the Corporations Act authorises a liquidator to:

• bring or defend legal proceedings in the name of the company and on the company’s behalf; and
  
  
• appoint solicitors to provide advice and assist in carrying out their duties as liquidator.

Section 477(2B) constrains those powers in respect of entry into ‘long-term’ contracts (i.e. contracts the term or performance of which is likely to exceed three months). For such long-term contracts, the liquidator must obtain approval of the court, the committee of inspection or a resolution of creditors.

By originating process, Mr Kitay sought to resolve the issues regarding the application of s 477(2B). He applied to the Court for declaratory relief and orders to the effect that:

• court approval was not required under s 477(2B) for entry into each of the costs agreements and retainers; or
  
  
• if approval for entry into the costs agreements and retainers was required, it be granted nunc pro tunc.

The case turned upon the capacity in which Mr Kitay entered into the agreements, in circumstances where it was unclear whether he contracted on his own behalf or as agent of CAT.

Decision

The Court considered the proper construction of s 477(2B) to determine the scope of a liquidator’s requirement to obtain court approval, including whether that requirement is restricted to agreements explicitly entered into on behalf of the company.

Hill J clarified that:

• section 477(2B) aims to ensure agreements assist with a company’s winding up and the proper realisation of its assets and are justified despite any resulting delays to the winding up;
  
  
• the absence of approval under s 477(2B) does not erode the validity of an agreement as between the liquidator and their counterparty; it only affects the liquidator’s rights vis-à-vis the company in liquidation;
  
  
• liquidators require court approval to enter into long-term agreements in the name of the company or as an agent for or representative of the company; and
  
  
• liquidators do not require court approval to enter into long-term agreements in their own capacity or for the provision of advice to the liquidator regarding the conduct of the winding up or their duties.

In applying the proper construction of s 477(2B) to each of the costs agreements and retainers, the Court considered:

• the substance of each agreement;
  
  
• whether CAT was a party to each agreement, or otherwise had the status of a party under the agreements; and
  
  
• which party (or parties) received the benefit of the services to be performed under the terms of each agreement.

Hill J held that some, but not all, of the costs agreements and retainers required court approval. In respect of the contracts that did require approval, Hill J granted that approval retrospectively.

Comment

This case provides an important caution to liquidators engaging solicitors and other professional advisors in the course of their duties.

Liquidators should turn their minds to whether they instruct advisors in their capacity as liquidator of the company, as agent of the company, or both. When in doubt, liquidators should consider seeking court approval for entry into long-term agreements.