Liquidator Allowed to Continue and Initiate Proceedings Against Directors

The Court allowed the liquidator to continue acting and to commence proceedings against the directors and a related company, finding a reasonable basis for such actions based on evidence and legal advice.

Supreme Court New South Wales

Medium Neutral Citation: In the Matter of [COMPANY] [2012] NSWSC 1283 Hearing dates: 3 September 2012 Decision date: 03 September 2012 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Directions to liquidator pursuant to Corporations Act s 511 Catchwords: CORPORATIONS - external administration - judicial advice to liquidator - whether liquidator ought to resign - where liquidator offered to resign during an application to remove the liquidator - where no undertaking to resign was given to court - where unrelated creditor does not seek removal of liquidator Legislation Cited: (Cth) Corporations Act 2001, s 511 Category: Interlocutory applications Parties: [NAME] as liquidator of [COMPANY] (In Liq) Representation: Counsel: [redacted] Ex parte Solicitors: [redacted] File Number(s): 2011/85485

Judgment (ex tempore) 1HIS HONOUR: The applicant is the liquidator of [COMPANY] which has two creditors: a related corporation, [COMPANY], which is its holding company, and which claims to be owed about $4.3 million; and [COMPANY], its former landlord, which claims to be owed approximately $9.4 million. The applicant seeks directions pursuant to (Cth) Corporations Act 2001, s 511, following earlier proceedings for removal of the liquidator. 2On 11 May 2011, the liquidator conducted public examinations of a number of individuals, but was unable to examine two overseas directors of the company. Further examination summonses for that purpose were issued, and were the subject of an application to have them set aside as an abuse of process, which application was dismissed by [NAME] on 8 July 2011. The liquidator then issued further examination summonses and orders for production to the overseas directors, whereupon a further application to have them set aside and have the liquidator removed for apprehended bias was foreshadowed. In response to that, the liquidator, on 22 August 2011, without admissions, offered to resign if certain preconditions were satisfied, including formation of a view that it would be necessary or possible to pursue substantial litigation against the former directors, appointment of a completely independent replacement liquidator, and completion of the examinations. That offer was not accepted by the related creditor, [NAME], who was the proposed applicant for removal of the liquidator. 3That application was then heard, again by [NAME], on 2 September 2011, and Her Honour dismissed it on multiple grounds. In the course of doing so, her Honour referred to the liquidator's offer to resign, and at some points (for example, in particular, at [125]) seems to have assumed that the liquidator would resign. However, the offer contained in the letter to which I have referred was never accepted, and no undertaking was given by the liquidator to the Court to resign. 4Since then, further evidence has come to light that the liquidator perceives as considerably strengthening a potential case against the directors. Counsel's advice has been sought in that respect. The unrelated creditor, [NAME], has specifically requested the liquidator to consider his position and remain as liquidator - conscious, so it would seem, that the appointment of a replacement liquidator would duplicate costs and waste some of the investment already made in investigating the potential causes of action against the former directors. 5Solicitors for the related creditor, [COMPANY], who have been consistently pressed for a direct response, have adopted the position that this application is unnecessary. When asked to do so, they have not formally stated that there is any ongoing objection to the liquidator remaining in office. Some of the correspondence makes clear that it has been explained to them that the perceived necessity for the present application is the potential that for the liquidator to remain in office might be seen as inconsistent with what was represented to [NAME]. 6The pragmatics of the situation are that, prima facie, there would appear to be a case worthy of investigation, if not prosecution, on behalf of the company against its former directors, and some third parties. That appears much more strongly to be the case now than formerly, since both evidence and Senior Counsel's opinion have been obtained in the meantime. One creditor specifically wishes the liquidator to remain in office; that creditor is significantly the majority creditor. The other creditor, a related company which once was the chief, if not only, proponent of the liquidator's removal, now adopts an ambivalent position. [NAME] referred to the liquidator's offer as if it were a relevant matter at points in her Honour's judgment, it did not provide the ratio of the judgment, and was not proffered to her Honour as an undertaking. 7In those circumstances, it seems to me that while the liquidator was well advised to seek the direction of the Court - given the potential for his remaining in office to be seen to be inconsistent with what [NAME] was told - there is no good reason why, having made that application, he should not be advised that it is appropriate for him to continue to act as liquidator. Notice of the application was given to the related creditor, who has not appeared to oppose it. 8An email from [NAME] to [NAME] and others, of 25 August 2006 and comprised in Exhibit MH4, provides significant evidence that the transaction by which the company entered into a lease with its parent, apparently on terms of a rent that substantially exceeded market, was knowingly not in the interests of the company, but for the benefit of its parent. It may be that further evidence can dispel this impression, but prima facie it creates a strong case. [NAME] of Senior Counsel, in his advice of 19 March 2012, expresses the conclusion that the liquidator has a reasonable basis to consider that the company was trading whilst insolvent prior to his appointment, and has a claim against the directors for a breach of fiduciary duty. 9In those circumstances, it seems to me that the liquidator would be justified in causing the company to institute proceedings in respect of those proposed causes of action. 10I make the following orders: (1)Pursuant to s 511 of the Corporations Act ("the Act"), the Court gives the following Directions to the Applicant as liquidator of [COMPANY] (the "Company"): (a)that he would be justified in not resigning as liquidator by reason only of the terms of the offer to resign previously made by him in a letter from his solicitors, [NAME] to [NAME] dated 22 August 2011; and (b)that he would be justified in causing the Company to commence proceedings against the directors of the company and against [COMPANY] in respect of the causes of action identified in the advice of senior counsel dated 19 March 2012. (2)The costs of this application will form part of the costs and expenses of the winding up of the Company.

********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 November 2012