Genie In A Bottle: Federal Court Grants Creditors Wish For Special Purpose Liquidators -

This week's TGIF considers the Federal Court's decision of In the matter of Boka Beverages Pty Ltd (In Liquidation) [2019] FCA 1184, regarding an application for the appointment of special purpose liquidators.

What happened?

Boka Beverages Pty Ltd (In Liquidation) (the Company) operated a beverage bottling plant. The first plaintiff (Melhelm) leased equipment to the second plaintiff (Icon), a brewing company, which operated from the same premises as, and procured bottling services from, the Company.

Following disagreements between the Company and Icon, culminating in the issue of a statutory demand by the Company, Icon vacated the shared premises, leaving behind Melhelm's equipment. After failed attempts to recover the equipment, Melhelm and Icon applied to the Federal Court seeking orders preventing the Company and Boka Investments from dealing with their equipment and requiring them to deliver up the equipment. Icon separately applied to have the statutory demand served on it set aside.

In May 2018, while these applications were pending determination, the Company was placed into liquidation by way of a members' voluntary winding up. This was converted to a creditors' voluntary winding up at the suggestion of Melhelm and Icon, on the basis that they would discontinue the delivery up application and have their claims be dealt with as proofs of debt.

Separately, Melhelm applied to ASIC for eligible applicant status, with a view to applying for examination summonses and production of documents in relation to a number of issues concerning the Company. Despite Melhelm's request that the proofs of debt not be adjudicated until its application was determined by ASIC, the liquidators rejected both Melhelm and Icon's claims entirely, shortly before Melhelm received authorisation to pursue public examinations.

A report issued by the liquidators in the following months stated that it was unlikely there would be any return to creditors.

The application

Melhelm and Icon applied to the Federal Court for the appointment of additional joint and several liquidators of the Company for specified purposes, pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations).

Melhelm and Icon argued that, despite their proofs of debt having been rejected by the liquidators, they had standing to apply for orders under section 90-15, and that it was appropriate to appoint special purpose liquidators (SPLs) to re-adjudicate their proofs and conduct further investigations into the Company.

Findings

Standing under section 90-15

In allowing the application, the Court found that the rejection of the plaintiffs' proofs did not prevent them from being recognised as a 'creditor' with standing under section 90-15:

"The fact that a person's proof of debt has been rejected by a liquidator does not, of itself, deny that person the status of creditor because that decision may be the subject of an appeal. Consistent with this, reg 5.6.54 of the Corporations Regulations 2001 (Cth) provides that a "creditor" may appeal against the rejection of a formal proof of debt or claim."

Further, the Court was satisfied that Melhelm, which had established that its equipment was left in the Company's possession, had a basis for asserting a right to participate in the division of the Company's assets and was a 'creditor' within the meaning of s 5-30 of the IPS.

Appointment of special purpose liquidators

To determine whether SPLs should be appointed, the Court applied the following test:

"It is appropriate to appoint an SPL if:

there are more matters that require investigation by a liquidator with a view to possible recovery for creditors;
the current liquidators have insufficient funds and insufficient prospects of obtaining funding to pursue an investigation;
a creditor is prepared to fund investigations and recovery actions but only on the condition that another liquidator be appointed; and
such an appointment would be beneficial to the winding up and the creditors as a whole..."

The Court found each of the above requirements had been met and made the following observations:

the plaintiffs' application had identified a number of special purposes that the additional liquidators could pursue;
comments made by the current liquidators in their latest report indicated they had neither the means nor the intention to pursue further investigations and their opposition to the application raised a "legitimate basis to doubt that [they] could re-adjudicate Melhelm's proof of debt with due impartiality";
Melhelm gave evidence that it would fund investigations conducted by the SPLs (an offer refused by the current liquidators unless Melhelm established to their satisfaction that it was a creditor); and
the appointment would be beneficial to the creditors as a whole, as there was reason to believe that Melhelm was a substantial third party creditor and, in such circumstances, further investigations were required into events which preceded the Company's winding up.

Comments

This decision indicates the Court's willingness to facilitate the appointment of SPLs, even where doing so may result in duplication of work conducted by the current liquidators. Further, it was not accepted that a finding of failure on the part of the liquidators is a pre-requisite to the appointment of the SPLs.

The decision also helpfully lists several special purposes for which the appointment of a SPL may be sought, including:

whether any of the directors or officers breached their statutory and or fiduciary duties;
whether transactions between the company and a specified third party were voidable transactions;
any dealing with an asset owned legally or beneficially by the company to a specified third party; and
any claim that the company may have or may have had against a specified third party.

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.