Dropping the gavel and donning the microscope: Court ordered inquiries into liquidator conduct

What are Court ordered inquiries into liquidator conduct?

Courts have a range of powers in relation to liquidators, including the power to order an inquiry into the external administration of a company and thus, the conduct of liquidators under sections 90-5 to 90-20 of Schedule 2 to the Corporations Act 2001 (Cth), previously, section 536 of the Corporations Act 2001.

These provisions give Courts the ability to make such orders either on its own initiative or in response to an application made by ‘a person with a financial interest in the external administration of the company, an officer of the company, a creditor or ASIC’. The Court also has a broad power to ‘make such orders as it thinks fit in relation to the external administration of a company’, including an order that a person cease to be the external administrator of the company or an order requiring a person to repay to the company remuneration paid to the person in the course of external administration.

When will a court order an inquiry into the conduct of liquidators?

Courts may order an inquiry into the external administration of a company either on their own initiative or on application by creditors. In both cases, Courts have full discretion as to whether or not to order an inquiry or not.

Courts are likely to order an inquiry if:

• There is criticism regarding to the conduct of a liquidator connected to performance of the liquidator’s duties; and
• There is a well based suspicion indicating a need for further investigation, which involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering.”[1]

When Courts are considering whether or not to exercise their discretion to conduct an inquiry, it may take into consideration the following factors:

• the nature and gravity of the alleged misconduct;
• the strength of the evidence of such misconduct;
• any explanation offered by the liquidator;
• the existence of other available remedies;
• the extent to which the liquidation has progressed;
• the amount of money likely to be involved;
• the availability of funds to pay for any inquiry;
• the likely benefit from the inquiry;
• the applicant’s legitimate interest in the outcome; and
• whether there has been delay in making the application.

To put this into context, we will look at a recent case: Australian Securities and Investments Commission v Wily & Hurst [2019] NSWSC 521

The Facts

In 2016, ASIC made an application to the New South Wales Supreme Court pursuant to the then section 536 of the Corporations Act 2001, seeking an order for an inquiry into the conduct of two liquidators during their involvement in the liquidation of a number of companies linked to Crystal Carwash chain. ASIC alleged that the liquidators were potentially liable for a range of breaches, including failing to disclose potential conflicts of interest, failing to disclose to ASIC suspected shadow directorships and failing to disclose potential conflicts of interest, particularly as many of the liquidated companies in question shared common directors and registered addresses.

The Result  

In May 2019, the NSW Supreme Court dismissed ASIC’s application with costs. Justice Brereton was not satisfied that there was a “well-based suspicion” indicating a need for further investigation into the liquidators’ conduct, more specifically:

• ASIC was unable to substantiate its claims of a conflict of interest as they were unable to prove that the companies had common referrers in regards to the external administrations in question;
• ASIC did not identify any actual conflicts of interest for the liquidators and the Court held that a potential conflict does not preclude liquidators from acting;
• ASIC failed to prove that the liquidated companies’ directors were shadow directors of each other company;
• ASIC failed to prove that the companies’ directors were engaged in phoenixing activity for which the liquidators failed to disclose. His Honour stated that just because one company “goes into liquidation, another with the same ownership and directors commences to provide the same services to the same customers does not amount to illegal phoenixing”[2]; and
• ASIC claimed that the liquidators failed to report matters to ASIC according to s 533 of the Corporations Act 2001,[3] but His Honour found that s 533 did not require liquidators to report to ASIC that a company may have shadow directors.

Key Takeaways

There are two main things to take away from this case.

First, ASIC’s application and involvement in this case demonstrates its increasing willingness to actively investigate and pursue allegations against liquidators.

Second, this case illustrates the Court’s reluctance to make orders granting an inquiry into the conduct of liquidators unless there is a ‘well-based suspicion’ warranting a further investigation, which involves a “positive feeling of actual apprehension or mistrust, as distinct from mere wondering”.[4] Thus, allegations against liquidators must be substantial enough to justify the exercise of the Court’s discretion on this matter. That being said, Courts have shown their willingness to intervene where liquidators are proven to have fallen short of their duties so as to cause or threaten to cause substantial injustice in some way.

If you have questions about a liquidator’s conduct, or the investigative provisions, talk to our Business & Commercial team or Litigation & Dispute Resolution team.

Written by Katie Innes with the assistance of Maxine Viertmann.

[1] Australian Securities and Investments Commission v Wily & Hurst [2019] NSWSC 521 [36].

[2] Ibid [77].

[3] S 533 of the Corporations Act 2001 (Cth) requires a liquidator of a company to make certain disclosures to ASIC regarding certain offences that may have occurred prior to the liquidation by officers of the company or others.

[4] Ibid [36].