TGIF 10 December 2021 – When can liquidators use partnership assets to satisfy creditors’ claims?

This week’s TGIF considers a recent decision that provides guidance on how and when a liquidator can sell partnership assets held by an insolvent corporate partnership manager to satisfy creditors’ claims.

Key Takeaways

• When a corporate partnership manager is an agent of the partners, it has a right of indemnity in respect of liabilities incurred in performing its role as manager and a possessory lien over partnership assets held by it as security for that indemnity.
  
  
• If the corporate partnership manager becomes insolvent, that right of indemnity is a right that will pass to a liquidator.
  
  
• The principles that apply to a liquidator dealing with property of insolvent corporate trustees apply by analogy to insolvent corporate partnership managers. A liquidator may seek a direction permitting them to sell partnership assets held by the manager in respect of which the manager holds a possessory lien.  

What happened?

For some years, Petromech Pty Ltd (Petromech) was the manager of a partnership between Gawn Enterprises Pty Ltd and Robert Linton Gawn (Gawn Partnership). In February 2021, Petromech was wound up.

The liquidator of Petromech then applied for directions to enable him to deal with the partnership assets held by Petromech, to satisfy liabilities Petromech had incurred as manager of the Gawn Partnership and to pay the liquidator’s remuneration and costs.

Why was Petromech an agent with a right of indemnity from the Gawn Partnership?

Justice O’Bryan first found that Petromech had conducted its business, and acquired assets and incurred liabilities, in its capacity as manager of the Gawn Partnership.

His Honour then turned to consider Petromech’s rights and interests in that role. In doing so, O’Bryan J followed Re Victoria Station Corp Pty Ltd (admins apt) (2018) 56 VR 26 (Re Victoria Station), in which Robson J considered that the manager of a partnership had conducted the partnership business as an agent, not a trustee.

Justice O’Bryan considered Petromech was similarly an agent because:

• the Gawn Partnership was created through the dissolution of a previous partnership by an agreement to which Petromech and the Gawn Partners were parties;
  
  
• by that dissolution agreement (which provided that Petromech had acted as manager of the previous partnership), the Gawn Partnership and Petromech consented to the conferral of authority on Petromech as agent; and
  
  
• the Gawn Partnership’s financial and tax records (which showed that Petromech traded on behalf of the Gawn Partnership), and the fact that Petromech held the Gawn Partnership’s assets in its own name, supported that conclusion.

Justice O’Bryan therefore considered Petromech had a right of indemnity against the Gawn Partnership partners in respect of liabilities incurred in performing its role as manager. Petromech had a possessory lien over the assets of the Gawn Partnership held by Petromech as security for that right of indemnity.

His Honour held that that right of indemnity passed to the liquidator on Petromech’s insolvency.

How could the liquidator deal with the Gawn Partnership assets?

Justice O’Bryan noted the established principles that:

• a liquidator of an insolvent (former) corporate trustee cannot sell the trust’s property without a court order, or by appointing a receiver; however,
  
  
• upon an appropriate application, courts are generally willing to make orders permitting the liquidator of a (former) corporate trustee to sell trust assets.

His Honour held that analogous principles apply to an insolvent (former) corporate manager of a partnership in respect of partnership assets held by the manager and over which the manager holds a possessory lien. In such a case, a court may also make orders permitting a liquidator to sell those partnership assets.

Accordingly, O’Bryan J made orders directing that the liquidator would be justified in selling those partnership assets for distribution to Petromech’s creditors and to pay the liquidator’s remuneration and costs of the application.

Comment

This decision gives some indication as to when an agency relationship will have existed between a corporate manager of a partnership and the partners as well as the implications of such a relationship for liquidators.

Importantly:

• partnership assets held by insolvent corporate partnership managers may be subject to a possessory lien as security for their right of indemnity for liabilities incurred in their roles as managers; and
  
  
• liquidators of corporate managers may be entitled to directions allowing them to sell those assets to satisfy the corporate manager’s debts to its creditors and to fund the liquidator’s remuneration and costs of making such an application.