Liquidator’s breach of statutory duty
A company in liquidation (by its new liquidator) brought proceedings against the former liquidator alleging a breach of the statutory duty of care under s180(1) of the Corporations Act (2001) (Cth) (Act).
The primary allegation was that the liquidator failed to take adequate steps to recover funds transferred out of the company’s bank accounts in the days leading up to his appointment. The central allegation was the failure to make any direct contact with the sole director of the company. The Court held1:
- There was a breach of the duty; and
- No loss was, however, suffered by the company. Accordingly no compensation was payable by the liquidator.
Background
The circumstances resulting in the failure to make direct contact with the director are peculiar. Ms Melinda Nicholls was the sole director and shareholder of the company, but members of her husband’s family were the primary investors and controlling minds (Mr Nicholls was a bankrupt).
After becoming estranged from her husband, Ms Nicholls sought advice from a financial advisor, Mr Levin, and subsequently implemented a scheme involving the transfer of company funds to entities associated with Ms Nicholls (and for payments to Mr Levin).
Mr Levin had all of the relevant dealings with the liquidator both before and after the appointment. Shortly after being appointed, the liquidator became aware of the transfers out of the company account (but not to whom) and contacted Mr Levin for an explanation. Mr Levin gave an evasive response. Critically, the liquidator did not contact Ms Nicholls for an explanation or to demand the repayment of the funds.
Allegations and issues
It was alleged that the liquidator had breached his duty by failing to contact Ms Nicholls directly to inquire about the funds and demand repayment.
The liquidator argued that, in all the circumstances, he had complied with his duty including because:
- It was reasonable to deal with Mr Levin as Ms Nicholl’s representative;
- It was reasonable to pursue separate inquiries rather than make contact with Ms Nicholls;
- Inquiries with Ms Nicholls were likely to be futile in any event; and
- There were other complicating factors including the threat of injunction proceedings by the Nicholls’ family, and the liquidator was without funds.
It was further argued that, even if there was a breach of duty, no loss was suffered because Ms Nicholls would not have paid the money in response to a direct enquiry.
The liquidator breached his duty
Justice Reeves of the Federal Court of Australia held that the liquidator had breached his duty. The Judge pointed out that his judgment was not setting an inflexible rule for all liquidations, and would not restrict the general discretion held by liquidators. Having regard, however, to the peculiar circumstances, including that the liquidator was suspicious of the answers given by Mr Levin, his Honour considered that the inquiries undertaken were not a valid substitute for a timely enquiry of Ms Nicholls.
Accordingly, his Honour held that the liquidator did not display the care and diligence of a reasonably competent liquidator and had therefore breached his duties under s180(1) of the Act. His Honour further commented that the conduct was more than a mere mistake or an error of judgment.
No loss suffered by the company
Notwithstanding that there was a breach of a duty, his Honour held that no loss was suffered by the company.
The claim was based on the proposition that, had the liquidator asked Ms Nicholls for the funds, she would have paid them. Ms Nicholls gave evidence to that effect but Justice Reeves did not accept that evidence in circumstances where Ms Nicholls and her financial adviser had implemented an elaborate scheme to divert the funds.
Costs order and appeal
In a subsequent judgment, Justice Reeves ordered that, because the company had been unsuccessful in obtaining an order for compensation, the costs of the liquidator should be paid out of the assets of the company. The (new) liquidator has subsequently implemented an appeal against the orders that no compensation is payable, and against the orders as to costs.
Role of pre-insolvency advisers and lessons learned
Although not expressly stated in the judgment, the case demonstrates the importance of independence from referrers and in particular pre-insolvency advisers. Allegation was made, although the judge was not prepared to make a finding to that effect, that the liquidator was not prepared to make further inquiry because of the possibility of an ongoing relationship with the financial adviser.
Notwithstanding that his Honour was at pains to say that he was not seeking to set any inflexible rule, it would generally be advisable to make direct inquiries of the directors particularly in relation to any suspicious transactions.
This article was written by David O’Farrell, Partner.
1Asden Developments Pty Ltd (in liq) [2016] FCA 788