Litigation services for Liquidators:

A liquidator can be sued for breaches of professional responsibility under the legislative scheme established by the Corporations Act 2001 (Cth), the principles enunciated by Courts in judicial decisions concerning the obligations of liquidators, or for failing to discharge a particular duty with respect to the company, its directors, creditors or debtors.

Litigation can be a lengthy and protracted process which could be emotionally and financially taxing. Proceedings before Court can be very expensive and it is of course preferable to ensure that the liquidator’s conduct is lawful (for more information, see our section on “Legal Advice for Liquidators”). If however a problem arises despite the liquidator’s best efforts to act within the parameters of the law, and where a negotiated resolution is not possible, Court proceedings may be unavoidable.

It is advisable to take immediate action as soon as it becomes clear that a matter may go to Court. Cases that go to the professional standards of liquidators may require complex expert evidence to be adduced, and time maybe of the essence.

The following is a non-exhaustive and general list of various matters that may give rise to a liability in certain circumstances, on the part of a liquidator acting in his or her professional capacity:

• An allegation that the liquidator has not carried on the business for the beneficial disposal of its assets or the company’s winding up;
• An allegation that creditors have not been paid their due if and when the liquidator is in a position to pay them accordingly;
• An allegation of some irregularity in a compromise or arrangement entered into with a creditor;
• An allegation that a compromise or arrangement with a creditor should be set aside on the grounds that the creditor is not in fact a creditor;
• Allegations of irregularity in any power exercised under section 447(1)(d);
• A question pertaining to the lawfulness or appropriateness of the liquidator’s actions in disposing of company property or assets;
• A question about the exercise of a power relating to calls on contributories;
• A question pertaining to the use of the company seal;
• A question relating to the legitimacy or lawfulness of conduct creating a liability on part of the company, such as entering into a deed, the drawing of a cheque or promissory note;
• A question concerning actions taken to secure credit;
• A suggestion that there has been a failure to take out administration in relation to the deceased estate of a contributory;
• A concern about the appointment of an agent to assist the liquidator to discharge his or her duties, rights and responsibilities;
• A concern about the manner in which books and company affairs are being inspected by the liquidator;
• An allegation that the liquidator has not had regard to the directions and decisions of the creditors or contributories in meeting, in respect to the administration of the company assets and the distribution of its property;
• A claim that an exercise of a discretionary power is illegitimate, unconscionable, harsh, oppressive or unfair;
• A claim that the liquidator is being remunerated above his or her entitlement;
• The failure to provide and/or table any necessary report to any authority or body, which report is mandated under the legislative scheme; and
• If and when the liquidator is of the belief or view that the company is insolvent:
  • The failure to apply for it to be wound up;
  • The failure to appoint an administrator;
  • The failure to requisition a meeting of creditors;
  • An allegation that the statement of the company assets presented before the creditors in meeting contains certain irregularities, or has not in fact been properly served;
  • A refusal or failure to indicate to the creditors in meeting that they have a right to appoint another liquidator if they so chose;
  • The failure or refusal to follow the prescribed procedural mandates or afford procedural fairness to all interested parties;
  • An allegation that the exercise of a liquidator’s power is excessive, ultra vires or outside of his or her jurisdiction;
  • A suggestion that the liquidator is in a conflict of interest situation, is not registered or solvent, giving rise to the possibility of a disqualification under section 532 (see below); and
  • Where there is a claim that an irregular dealing has occurred in relation to:
    • Money received or paid out by him or her; or
    • The manner that bills, notes and similar instruments have been received or paid out by him or her.
  • Where there is a claim against a liquidator, in relevant circumstances, that the liquidator has not conducted himself or herself:
    • With due care;
    • In good faith; or
    • For the benefit of the creditors.
  • Where there is a claim that the liquidators appointment is pursuant to some gift of valuable consideration for the purposes of procuring that person to consent to act as liquidator; and
  • Other matters that may arise on a case by case basis.

Under section 532 of the Corporations Act 2001 (Cth) a liquidator or a provisional liquidator can be disqualified from his position and duties. Disqualification can occur under certain conditions. To avoid disqualification, a liquidator must:

• Be registered;
• Not be in a position of conflict of interest;
• Not be insolvent;
• Not be in the process of winding up; and
• Have accepted the appointment of liquidator in writing.

Some of the matters raised in the bullet point list under the above sub-title “Matters that can give rise to a Claim against a Liquidator” may also give rise to a cause of action for the disqualification of a liquidator.

Whether or not a disqualification is open against a liquidator is an evidence based matter and requires a detailed and diligent inspection of all records and documents that may lead to a liability under this section.

A liquidator can have his or her registration cancelled or suspended under the provisions of Chapter 9, Part 3 of the Corporations Act 2001 (Cth). Matters that give rise to a possible cancellation or suspension include the following under section 1290A:

• Where the liquidator becomes insolvent under administration;
• Where the liquidator becomes disqualified from managing a corporation under Part 2D.6 of the Act; and
• Where the liquidator fails to maintain adequate insurance as mandated under section 1284 of the Act.

Cancellations and suspensions are managed by the Australian Securities and Investments Commission. The Board also has powers that allow it to cancel or suspend a liquidator’s registration. Some of the matters that will allow the Board to exercise its powers under section 1292(2) of the Act include:

• Where the liquidator has failed to provide a yearly statement under section 1288 and the relevant Regulations;
• Where the liquidator is no longer a resident in Australia;
• Where the liquidator is found to have failed to carry out his professional duties;
• Where the liquidator is found to no longer be a fit and proper person under the law; and
• Where the liquidator is found to be incapable of performing his or her duties due to infirmity or other disability.

In dealing with a liquidator who may fall under any of the above categories, alternative powers to deal with the situation are available to the Board. These powers can be exercised in addition to or in substitute for the powers to cancel or suspend a registration. These further powers include:

• The power to admonish or reprimand the liquidator; or
• The power to require that the liquidator provide undertakings asserting that the liquidator will refrain from the conduct (with or without specific conditions) which gave rise to the Board taking action.

Of course, the Board cannot exercise any of its powers unless it has afforded procedural fairness under section 1294 of the Act to the liquidator under question. The liquidator should be given the opportunity to appear before the Board and make submissions in his or her defense. A pre-hearing conference can be held, in which representatives from ASIC and APRA may be invited to adduce evidence and make submissions. The Board’s decisions must be made with notice on relevant parties.

Some of the matters raised in the bullet point list under the above sub-title “Matters that can give rise to a Claim against a Liquidator” may also give rise to a cause of action for the cancellation or suspension of a liquidator.

A liquidator has the power to institute legal proceedings or continue existing legal proceedings under section 477(2)(a) of the Corporations Act 2001 (Cth) or appoint a solicitor to assist in the discharge of the liquidator’s duties under section 477(2)(b) of the Act. A liquidator can also institute legal proceedings to enforce the lawful exercise of his or her powers. Some of the matters that a liquidator can commence proceedings for, include matters involving delinquent officers and members (under the direction of the Australian Securities and Investments Commission). These matters can only be addressed on a case by case basis and legal advice should be obtained from an experienced legal practitioner where an issue arises under this title.