(Blondie)
(When a liquidator’s seemingly small omission can have serious consequences)

In the 2016 case of Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788 (a six day trial) the Federal Court found that a liquidator had in effect breached his duty as an officer under Section 180 of the Corporations Act 2001 (Cth) (“the Act”) to act with care and diligence because he had failed to personally call a company director to enquire about a transfer of company funds made immediately prior to liquidation.

For me, this relatively recent case is pertinent to my work as an insolvency practitioner as it is a reminder of:

  1. A liquidator’s duties of care and diligence under Section 180 of the Act.
  2. The need as a liquidator to be constantly vigilant, undertake timely investigations and make all reasonable personal enquiries to locate and collect in the insolvent company’s assets. And not to overlook the seemingly small but consequential issues.
  3. The possible consequences, and prudent wariness to be had, of the involvement of pre-insolvency advisors.
Liquidator’s duties of care and diligence under Section 180 of the Act

Section 180 of the Act imposes a duty of care and diligence on all officers of the company. The Section 9 definition of officer in the Act includes a receiver and manager, administrator, deed administrator and liquidator.

The earlier 2014 case of Viscariello v Macks [2014] SASC 189 confirmed that liquidators have heavy responsibilities and that independence, impartiality, skill and diligence are critical. This standard expected of liquidators was reiterated in the Asden case.

Further, not only are liquidators subject to the same statutory duty as directors, they are also required to meet the higher standard of care and diligence expected of persons who have a liquidator’s special qualification, training and experience and who are paid to exercise those professional skills.

I note in passing that in the Asden decision his Honour Justice Reeves commented that the “business judgement rule” (a statutory defence to Section 180 which reflects the Court’s reluctance to interfere in commercial “business judgement” decisions) would not have been available to the liquidator involved. Reeves J stated that the case concerned the liquidator’s statutory obligations to investigate and, as such, fell outside the ambit of a decision made in the conduct of the company’s business or commercial activities, and that therefore, the business judgement rule could not apply.

Need for a liquidator to be constantly vigilant

For me, this issue involves ensuring my insolvency practice has good practice management of administrations, which involves a myriad of issues including:

  • Close and detailed supervision and monitoring of administrations and staff.
  • Proper training, and on-going training, of all staff (including me).
  • Maintenance of and safeguarding independence.
  • Development of the appropriate culture and ethos.
  • Development of the appropriate procedures and policies.
  • Implementing and maintaining the appropriate technology to support our work.
  • Continually ensuring we are capable and resourced, through our training, procedures, policies and technology.

Notwithstanding that I have been the external administrator of hundreds of companies (or maybe because of this!), the two key practical practice issues for me are:

  1. Remembering that each liquidation is unique as to its circumstances and facts. No two administrations are ever entirely the same.
  2. To avoid becoming complacent as to the process and the work to be done (i.e. maintaining a constant vigilance).
Pre-insolvency advisors

Unregulated pre-insolvency advisors are currently in general a worry and concern for the insolvency industry and regulators.

Serious consequences can flow from the involvement of unregulated, unscrupulous pre-insolvency advisors.

From our experience with pre-insolvency advisors, we have found that if we detect the involvement of such an advisor in an administration then we should ensure:

  1. We determine the extent and nature of the work done, and advice given, by the pre-insolvency advisor (and if appropriate and possible, obtain access to their files).
  2. We determine what monies and/or fees have been paid to the pre-insolvency advisor.
  3. We do not allow the pre-insolvency advisor to attempt to “road block” our access to or communications with directors (or bankrupts), which is something we have experienced in a couple of administrations.
Facts of the Asden case

Well, this is turning out to be a rather long article.

If you have got this far, and have a little more time, please stay with it and read the brief facts of the Asden case, as they are interesting albeit lengthy.

  • Asden was incorporated to be involved in a property development in Brisbane to be undertaken by various members of the Nichols family on land owned by members of the Nichols family.
  • Ms Melinda Nichols was the sole director and shareholder of Asden, purportedly because her husband was bankrupt and could therefore not be a director.
  • Ms Nichols claims she was misled by her husband regarding the affairs of the company, and only later became aware that the company was facing financial difficulty.
  • Ms Nichols borrowed money ($270,000) from another Nichols family member (Ms Nichols’ husband’s father) for the purpose of paying Asden’s creditors.
  • Ms Nichols and her husband then separated which caused ill will between Ms Nichols and other members of the Nichols family.
  • Ms Nichols, concerned about the affairs of the company, sought advice from the company’s accountants, who referred her to a pre-insolvency advisor, Mr Levis.
  • From that time on, Ms Nichols relied on Mr Levis’ advice.
  • When Ms Nichols first approached Mr Levis, she still had in the company’s Suncorp bank account the majority of the money she had borrowed to pay creditors.
  • The pre-insolvency advisor designed what Reeves J described as an ‘elaborate’ scheme (not one which apparently considered the interests of creditors or the obligations of Ms Nichols as director).
  • A new company TJI Investments Pty Ltd (“TJI”) was incorporated. Ms Nichols was the sole director and shareholder. A bank account for TJI was opened with the Bank of Queensland (“BOQ”).
  • A new bank account with BOQ was also established in Asden’s name.
  • Asden’s cash at bank with Suncorp of $264,500 was transferred to Asden’s BOQ bank account.
  • One day before the company was placed into liquidation the sum of $236,500 was transferred from Asden’s BOQ bank account to the company Urban Property Pty Limited (“Urban Property”).
  • Mr Levis was the sole director of Urban Property.
  • Urban Property then transferred $180,000 to TJI’s BOQ bank account.
  • Asden was placed into voluntary liquidation on 22 December 2010.
  • Subsequently, approximately three years later, by Order of the Supreme Court of Queensland (upon application by the Nichols family), the original liquidator was removed and a second liquidator appointed.
  • The second liquidator brought action against the first liquidator for breach of his Section 180 duties.

It should also be noted that:

  • Before being appointed, the first liquidator was told by Mr Levis that if the liquidator wished to communicate with Ms Nichols he should do so through Mr Levis.
  • On 22 December 2010 information supplied by BOQ alerted the first liquidator to the fact that $236,500 had been transferred out of Asden’s BOQ bank account, but it was not revealed who had received this money.
  • The liquidator asked Mr Levis about the transfer of funds out of Asden’s bank account. Mr Levis gave an evasive response stating that the monies were not received by Ms Nichols personally and that the liquidator should investigate the withdrawal of the funds.
  • The liquidator obtained a withdrawal slip signed by Ms Nichols showing that she had authorised the withdrawal of the money.
  • The liquidator admitted that he had expressed some doubt about the veracity of what he had been told by Mr Levis.
  • The liquidator did not telephone Ms Nichols to ask her about the transfer of funds.
  • The liquidator sent Ms Nichols a ‘standard’ letter concerning her obligations in the winding up but did not specifically write to her about the funds transfer.
  • The liquidator subsequently unsuccessfully attempted to seek funding from creditors to undertake a public examination of Ms Nichols.

The consequence of the ‘scheme’ was that:

  1. Mr Levis received $56,500 of the fund.
  2. Ms Nichols’ company TJI received $180,000.
  3. Asden was left with no money.

These are the brief and pertinent facts. There is more, including an issue of a subsidiary matter concerning the first liquidator’s conduct regarding the sale of a company boat, but for the purpose of this article, enough’s enough.

As a result of the above facts regarding the withdrawal of funds, the second liquidator brought proceedings against the first liquidator alleging that the first liquidator had breached his duty as officer of the company by failing to telephone Ms Nichols as soon as he found out about the withdrawal of funds to demand the return of the money transferred.

The first liquidator raised a number of defences to the claim:

  • it was reasonable to deal with Mr Levis as Ms Nichols’ representative
  • it was reasonable to pursue separate inquiries rather than make contact with Ms Nichols
  • he was concerned that attempts to contact the director would lead to the funds being dispersed
  • inquiries of Ms Nichols were likely to be futile in any event, and
  • there were complicating factors, including the threat of injunction proceedings by the Nichols family, and the liquidator was without funds.

Reeves J held that the first liquidator had breached his duty of care and diligence under Section 180 of the Act in failing to make any direct personal contact with Ms Nichols:

“… I do not consider the liquidator displayed the care and diligence of a reasonably competent liquidator when he made his decision late on the afternoon of 23 December 2010, and maintained that decision thereafter, not to attempt to make any direct personal contact with Ms Nichols and enquire about the funds that she had withdrawn.”        

The liquidator’s action, or inaction, was found not to be a mistake or error of judgement but rather a breach of his statutory duty.

However, the Court was not satisfied that the breach of duty by the liquidator had caused a loss. Accordingly, no compensation was payable under Section 1317H of the Act. Further, Asden was subsequently ordered to pay the first liquidator’s costs for the trial.

The Court found that even if the liquidator had contacted Ms Nichols directly, the likelihood is that she would not have agreed to pay back the funds that had been transferred out of the company (because Ms Nichols was acting solely on the advice of Mr Levis and in all likelihood he would not have advised her to repay the funds to the liquidator).

Notwithstanding the no damages conclusion:

  1. There was still the damaging judgment that the first liquidator had been in breach of his duties.
  2. There was still the process for the first liquidator of dealing with and defending the claim, and this was likely to have been exacting and painful.
  3. The Court’s decision as to whether any damage resulted from the breach could, on a different judge’s assessment of the evidence, have gone another way.
  4. The Court could have delivered a much harsher decision on a slightly different set of facts.

Finally, as a footnote, I observe that in subsequent proceedings in the Family Court, the original lender of the funds to Ms Nichols/Asden obtained a judgement against:

  1. Ms Nichols and recovered the balance of the monies being held by TJI.
  2. Mr Levis for the money paid to Urban Property.

A sobering and timely warning or reminder to liquidators (and other external administrators).

Small omissions can have serious consequences.

Who would be a liquidator?