Australia: Liquidator seeks court direction where risk of legal controversy

This week's TGIF considers the case of In the matter of Idoport Pty Limited (in liquidation) [2015] NSWSC 1412 in which the Court reinforced that a reluctance to give directions to a liquidator in respect of commercial matters is qualified in respect of matters which are capable of giving rise to a legal controversy.

WHAT HAPPENED?

The liquidator of Idoport Pty Limited (in liquidation) (Idoport) brought an application under s 479(3) of the Corporations Act 2001 (Cth) (the Act) seeking a direction as to whether he was justified in entering into a Deed of Release with a creditor following a lengthy dispute relating to a Consulting Agreement. The liquidator sought a further direction as to whether he was entitled to an equitable lien over any moneys payable to Idoport pursuant to the Deed of Release for payment of costs and expenses in negotiating and entering into the Deed of Release.

THE COURT'S POWER TO MAKE DIRECTIONS UNDER THE ACT

Section 479(3) of the Act allows a liquidator to apply to a Court for directions in relation to a matter arising under a winding up.

The function of the liquidator's action for direction under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation, but does not typically extend to matters or decisions of a commercial nature, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of a decision.

As Justice Black said in Idoport, the importance of such a direction is that a liquidator is then protected against a claim for breach of duty if he or she acts in accordance with that direction and has made full disclosure to the Court in the relevant application.

THE COURT'S DECISION

In the circumstances of this case, Justice Black was satisfied that this matter was not one in which the liquidator had sought that a commercial judgment be made for him. Given the long history of litigation in the matter, and the possibility that his decision may be attacked, his Honour found it appropriate to afford the liquidator the protection provided by a direction of the kind sought.

The Court held that the liquidator's proposed course of action was appropriate and reasonable in the circumstances as there were insufficient funds available to pursue litigation and the books and records of Idoport were no longer in his possession thereby impeding a full assessment of the prospects of any claim under the Agreement.

Furthermore, neither the liquidator nor receivers appointed to Idoport had been able to conclude an agreement in relation to an assignment of rights under the Consulting Agreement. The liquidator adduced evidence that those rights, on his assessment, had limited value and it was unlikely that a party would take such an assignment given the background to the matter.

Indeed, the Court noted that the Deed of Release was the only offer made or procured by any of the creditors with respect to Idoport's rights under the Agreement and full disclosure had been made by the liquidator to creditors about his reasoning in respect of the proposed transaction.

As such, the Court provided the direction sought by the liquidator as the course of action proposed was a rational commercial decision and consistent with the exercise of the liquidator's duties and good faith.

WAS THE LIQUIDATOR ENTITLED TO AN EQUITABLE LIEN?

The Court also dealt with the further question as to whether a direction should be given to the liquidator that he would be justified in exercising an equitable lien over any moneys payable to Idoport pursuant to the Deed of Release.

His Honour queried whether the direction was necessary given the established principles on the existence and application of an equitable lien, however, it was accepted that, although it might be apparent to a lawyer that a liquidator's costs properly and reasonably incurred are subject to a lien, it would not necessarily be apparent to creditors. This may leave the liquidator exposed to the risk of potentially unreasonable views of other parties if the direction sought was not granted.

However, the Court stressed that the direction did not extend to a determination of the amount of costs and expenses of the liquidator that were the subject of such a lien.

COMMENT

The case demonstrates the Court's willingness to provide directions to liquidators in circumstances where there is a legitimate concern that a commercial decision may lead to a legal controversy. This is particularly so where commercial decisions are made in the context of complex, and lengthy, litigious proceedings.

Liquidators should ensure, upon seeking such a direction, that full disclosure is made to creditors and the court and that any proposed decision is consistent with the liquidator's duties in the winding up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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