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Salvaging an Insolvency when the Liquidator was Invalidly Appointed

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By Maxim Oppy, Law Clerk and Alicia Hill, Principal, MST Lawyers

The recent decision of the Victorian Supreme Court, In the Matter of Polat Enterprises Pty Ltd (in liq) [2020] VSC 485, is a compelling reminder of the consequences of an invalid resolution for winding up a company. This case illustrates the challenges raised by an invalid appointment of liquidators, but also demonstrates the powers of the Court to provide orders that allow the liquidation to continue where considered appropriate.

Background

Polat Enterprises Pty Ltd (the Company) was incorporated in October 2014 with Mr Bolat Shadinoufu as sole director and shareholder. The defendant in this case, Ms Asiya Khasim (Ms Khasim), had loaned over $1,000,000 to the Company, as security for this investment, she became the sole director and shareholder of the Company in February 2015.

By 2016, the company had no profit and a significant debt to the ATO, in these circumstances, Ms Khasim then caused the Company to make payments to her totalling $574,000.

In February 2017, the Company was purportedly placed into liquidation by a resolution of its sole shareholder. Peter Vince and Paul Langdon (the Liquidators) were appointed as liquidators. After investigating the Company’s affairs, they claimed the payments made by the Company to Ms Khasim were unfair preference payments under section 588FA of the Corporations Act which must be repaid.

In response, Ms Khasim claimed that the resolution was invalid and consequently the Liquidators had no standing to proceed against her. She claimed this on the basis that she was the sole shareholder at the time of the liquidation resolution and she had not received notice of, attended or voted in favour of a resolution to place the company into liquidation.

Uncertainty over Liquidation and Compromise

In fact, Ms Khasim had been removed as sole director and shareholder of the Company two-weeks prior to the liquidation resolution. She had been replaced by a relative of Mr Shadinoufu. Ms Khasim claimed to have no knowledge of this, and Associate Justice Hetyey accordingly noted that this raised significant uncertainty over the validity of the resolutions, given the large evidential hurdle faced by the Liquidators if they wanted to prove she knew about, and agreed to, her resigning as director and transferring her shares.

In light of these revelations, the parties proposed consent orders as follow:

  • The resolutions were to be declared invalid and ineffective
  • The Court would order the company to be wound up
  • The relation-back day would remain the date of the purported passage of the resolution
  • Mr Vince and Mr Langdon would be given leave to act as liquidators, and be appointed as liquidators
  • The parties were approved to enter a Deed of Settlement whereby Ms Khasim would pay the Liquidators $90,000 over three months for release of their claims against her.

Relevant Law

Section 477(2B) of the Corporations Act provides that a liquidator can only enter settlement agreements on the company’s behalf that will last more than 3 months with the approval of the Court or a resolution of creditors. The court will generally only interfere if there is a lack of good faith, or if the agreement will unduly prolong the winding-up.

Section 90-15 of the Insolvency Practice Schedule provides a broad power to the court to make such orders as it think fit in relation to the external administration of a company, including as to substantive rights, matters of law or questions of legal procedure.

Under section 90-20, any person with a financial interest in the external administration of a company may apply for an order under section 90-15.

The Decision

Associate Justice Heytey approved the proposed consent orders. His Honour held that it was appropriate to declare the resolutions invalid on the basis of the uncertainties surrounding the liquidation resolution.

His Honour also granted leave for the Liquidators to apply for a winding up of the company, and approved the winding-up. The Liquidators had standing to apply for winding as creditors. This is because, due to their work in the previous winding-up, they had claims of remuneration on the basis of either quantum meruit or restitution. As the company had been insolvent from at least August 2015 and remained so, His Honour ordered that it be wound up and appointed Mr Vince and Mr Langdon as the liquidators.

The settlement deed between the parties was also approved the basis that:

  • Its three month duration would not unduly prejudice the administration of the winding-up
  • The deed was negotiated by the parties with legal representation
  • The liquidation is otherwise unfunded
  • An unfair preference claim has risk attached and the Liquidators are therefore justified in entering into the deed.

His Honour raised an additional question over whether the Liquidators could claim priority under section 556 of the Corporations Act in respect of their remuneration prior to the judgement.

The question was not raised before the Court, but His Honour thought it possible that the Liquidators would have to ask the Court to validate their proceedings in the former winding up and enable fees to be treated in priority.

Commercial considerations

This case highlights an available avenue for liquidators who find that their appointment may have been invalid.

Section 90-15 of the Insolvency Practice Schedule provides the Court with broad powers, including to re-appoint the liquidator in a new winding up of an insolvent company. Further, it affirms that a liquidator in such a case may still be entitled to remuneration on the basis of quantum meruit or restitution.

The consent orders approved in this case also demonstrate the importance of effective and informed negotiation in the face of a complex insolvency situation. If making such an application it would also be prudent to address the potential costs priority issue in the one application rather than leaving it and potentially having to come back to court for further orders.

Please contact Alicia Hill on (03) 8540 0200 or Alicia.hill@mst.com.au if you have any questions regarding this article or require any advice relating to insolvency.