A Question of Law: The Court’s Discretion to Give Directions to Liquidators

By Alicia Hill, Principal and Evangeline Yong, Law Clerk

In the recent case of Knight, in the matter of GMG Victoria Holdings Pty Ltd (In Liq) [2021] FCA 86, the Federal Court considered the circumstances in which the Court can give directions to liquidators in the process of winding up a company.

Background

Tracey Knight and Damien Lau were appointed as liquidators of GMG Victoria Holdings (the Company) on 4 March 2019. On 21 March 2019, they were also appointed as liquidators of four entities related to the Company.

After conducting investigations into the Company’s affairs, the liquidators found that each of the four related entities had previously made loans to the Company and now each had a claim in the liquidation of the Company for the repayment of those loans.

A conflict of interest

In their capacity as liquidators of the related entities, the liquidators prepared and lodged proofs of debt for each entity’s claim in the liquidation of the Company.

However, in their capacity as liquidators of the Company, they were also required to determine whether each proof should be admitted in the winding up of the Company as a proper proof of debt.

In addition, the liquidators had a financial interest in establishing the four entities’ claim in the liquidation of the Company. This interest arose from their own claim for unpaid remuneration and disbursements in the liquidation of the four related entities.

The liquidators were therefore in a position of conflict of duty and interest. As a result, they applied to the Court for a direction that the proof of debt claimed by each related entity be admitted. The application was made pursuant to section 600K of the Corporations Act 2001 (Cth) (the “Act”) and clause 90-15(1) of the Insolvency Practice Schedule (Corporations), Schedule 2 to the Act.

The exercise of the Court’s discretion in giving directions

Section 600K and clause 90-15(1) together authorise the Court to “make such order as it thinks fit in relation to the external administration of a company,” including an order “determining any question arising in the external administration of the company.”

Justice Greenwood considered that the Court’s discretion under these provisions was strictly limited to determining “particular legal question[s] arising in relation to the propriety or reasonableness of [the liquidator’s] decision.” It was not the Court’s role to “substitute its own view about whether a proof of debt ought to be admitted in the liquidation” or to direct liquidators in relation to the commercial and business decisions that they were appointed to make.

The outcome

Justice Greenwood held that the issue of whether the liquidators had properly exercised their duties in light of the conflict was a legal question which the Court was empowered to consider under clause 90-15.

His Honour considered that this determination necessarily involved an examination of:

• the reasoning of the liquidators in exercising their duties;
• the evidence of steps taken by the liquidators in preparing each proof of debt;
• the analysis undertaken by the [independent] expert in assessing each proof of debt; and
• the documents underlying that analysis.

His Honour found that the liquidators and the independent expert appointed by the liquidators had thoroughly and properly investigated the basis for the claims of debt and followed a proper process in doing so.

His Honour considered that there was no evidence to suggest that the liquidators had not faithfully performed their duties or failed to comply with the Act or any court Orders. The known creditors of the Company and related entities, as well as ASIC, had been notified of the application under 90-15(1) and had not objected to the directions sought.

Justice Greenwood considered that the application to the Court was ‘properly made so as to advance the liquidation of the Company and the administration of the Company’s assets in liquidation.’ The costs of the application were costs in liquidation of the Company and paid from Company assets. His Honour therefore gave the direction sought by the liquidators, ordering that they were justified in admitting the proofs of debt claimed by the four related entities.

Take-aways

Liquidators who believe that they are conflicted, or who are concerned about the propriety or reasonableness of their decisions, should consider exercising their right to seek directions from the Court. However, this case also serves as a reminder that the Court will seek to avoid making a judgment on the commercial soundness of liquidators’ conduct.

If you have any queries about your duties and obligations as a liquidator or insolvency matters more generally, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au.