Special purpose liquidators – can they help you recover your debts?

Often when a company goes into liquidation unsecured creditors are left wondering whether they are likely to get paid. Special purpose liquidators can provide unsecured creditors with a weapon to recover their debts.

The power of a court to appoint a special purpose liquidator stems from section 511 of the Corporations Act 2001 (Cth).

In order to successfully make a request under section 511, a person must be either the liquidator, a contributory (shareholder) or a creditor.

In Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd, Justice Barrett of the New South Wales Supreme Court ordered the appointment of a special purpose liquidator following the request of an unsecured creditor who wished to fund the appointment.

The creditor Ms Lo wanted to investigate specifically alleged insolvent trading by the directors, the granting of security and the transfer of debts to associated parties by the company’s directors and the sale of property to those associated parties whilst the company was in administration.

The administrator who had been initially appointed by the directors of the company subsequently became the liquidator. Ms Lo was clearly concerned that the liquidator may have in fact had a conflict in investigating the transactions given some of the matters occurred whilst the liquidator was the administrator of the company.

Ms Lo did not seek to remove or replace the liquidator more than likely because of the substantial case law that exists in this area which makes it clear it is not an application that always succeeds even if on its face there appears to be a conflict of interest that may exist.

The advantage of seeking the appointment of a special purpose liquidator for Ms Lo was that she would be funding the investigation of the specific transactions she wanted investigated rather than transactions which the liquidator considered ought to be investigated.

In addition to having standing, the key factors that Justice Barrett considered when granting Ms Lo’s application were that:

• Ms Lo was prepared to fund the special purpose liquidator herself, that is the special purpose liquidator would not have access to the company’s assets to pay the special purpose liquidator’s fees
• Whether it was “just and beneficial” to make the order in the circumstanced. Justice Barrett considered it important that any recovery resulting from the work of the additional liquidator would benefit all the creditors, not just the creditor who was seeking the appointment of the special purpose liquidator.

Further facts that influenced Justice Barrett’s decision in this case were that although the Court did not consider that the liquidator had any conflict of interest, he did not have the funds to complete the requested investigations.

Creditors who have concerns about the work being performed by a liquidator should consider whether a special purpose liquidator may assist them in recovery of debts owed and contact one of our Dispute Resolution & Litigation lawyers for assistance.

Author: Mary Nemeth & Louise Tolson