What is a special purpose liquidator?
A special purpose liquidator is a liquidator who is appointed by the Court to carry out a specific function in the liquidation of a company, usually where a situation of conflict arises with the acting liquidator.
When will the Court order that a special purpose liquidator be appointed?
Generally, only one liquidator will be appointed by the Court to wind up a company. However, the Court may appoint more than one liquidator if the administration is potentially complex and/or substantial assets of the company are located overseas or interstate. The Court has the power to appoint a further liquidator at any time during the course of the proceedings. In Re Obie Pty Ltd (No 4) (1984) 8 ACLR 967, Thomas J stated as follows:
“it has long been held that the court has jurisdiction to give the conduct of any particular matter arising in the course of liquidation to one of several liquidators.”
The Court may appoint a special purpose liquidator to carry out a significant function in a liquidation if the appointed liquidator has an actual or potential conflict of interest in connection with the subject of the investigation. However, the Court will only do so when the conflict of interest does not taint the whole of the liquidator’s administration and the additional cost is justified to appoint a special purpose liquidator to carry out the particular function.
It has been held that the Court may appoint a special purpose liquidator in the following circumstances:
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where the primary liquidator has a conflict or may not be seen to be independent as to some particular and discrete matter; and
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where the liquidator may feel some embarrassment because of commercial connections (Spedley Securities Ltd (In Liquidation) (1991) 9 ACLC 700) (“Spedley Securities”).
In Spedley Securities, Justice Young made the following statement in support of his appointment of an additional liquidator to oversee a particular aspect of the liquidation of Spedley Securities Ltd (In Liquidation):
“In my own experience courts have made such orders when there is a matter to be dealt with in liquidation which it would be embarrassing for the liquidators to handle. In such circumstances an additional liquidator is appointed to handle that matter, and the great expense and loss of efficiency involved in resignation and replacement in a partially completed administration is avoided.”
However, the Court has its own unfettered discretion to appoint a liquidator and the circumstances in which it canappoint a special purpose liquidator are not limited to the above.
In determining whether a special purpose liquidator should be appointed, the Court also considers the question of cost to the company in liquidation. The appointment of an extra liquidator will be a considerable expense to the company (and hence the creditors), so the Court must be satisfied that it is justified before an order for an extra appointment is made.
Some cases on special purpose liquidators
Onefone Australia Pty Ltd v One.Tel Limited (in Liquidation) [2003] NSWSC 1228 (“One.Tel”)
Prior to the appointment of administrators, One.Tel Limited had determined to raise additional capital through a renounceable rights issue under which capital of $132 million was to be sought from shareholders through the issue of new shares. The company announced the rights issue to the Australian Stock Exchange through the media on 17 May 2001.
A meeting of the directors was held on 28 May 2001. One of the future liquidators, Mr Sherman, was present at that meeting. At that meeting, Mr Sherman gave some limited advice to the directors of One.Tel Limited on the financial position and solvency of One.Tel Limited.
On 29 May 2001, a further meeting of the directors was held. Mr Sherman also attended this meeting. As a result of further information on creditors and likely funding requirements in the new future, it was accepted by the directors that a rights issue raising $132 million would not be sufficient for the company, and on one basis would not enable it to pay its existing commitments. A resolution was then put that the issue be cancelled. Mr Sherman then explained the process of administration and provided his consent to act if appointed. A resolution was then passed appointing him and Mr Walker joint administrators of One.Tel Limited.
One of the areas for the liquidators to investigate was the circumstances in which the proposed rights issue did not proceed, however the tasks required of the liquidators were far greater than just this discreet issue. It was clear to the directors of One.Tel Limited that there was a question of a conflict of interest on the part of the liquidators, particularly in regards to the advice given to One.Tel Limited by Mr Sherman.
At the annual general meeting of the creditors, a resolution was put that the liquidators of One.Tel Limited should approach the Court for the appointment of a special purpose liquidator.
The resolution was carried by the creditors as to number but not as to value and was finally declared lost by the chairman. The proceedings were commenced by an originating process filed by some creditors on 15 October 2003.
At the hearing, Windeyer J held that a special purpose liquidator be appointed and Mr Paul Weston was appointed. At paragraph 11, Windeyer J concluded as follows:
“There can be no doubt that if there were some claim against the directors for a breach of duty in respect of the cancellation of the rights issue then there would be a good chance that Mr Sherman would be joined by the directors as a cross-defendant, thereby placing him in an almost impossible position. It is not necessary to decide whether the limited part played by Mr Sherman in the meetings on 28 May and 29 May 2001, would result in the company having any claim against him for advice given or not given at those meetings. There is a possibility of some liability. That would obviously place Mr Sherman in a position of conflict in considering whether or not a claim should be brought on behalf of the company against the directors for some loss arising from the cancellation issue.”
The issue of the liquidator’s potential liability is yet to be fully ventilated, and the examination by Mr Weston is presently being conducted in the Federal Court.
McGrath and Anor Re HIH Insurance Ltd and Ors [2006] NSWSC 385
The existing liquidators of HIH Insurance Ltd and its related companies sought an order for the appointment of an additional liquidator to assist with the winding up of FAI Insurances Limited and FAI General Insurance Co Limited (“FAI Companies”).
The liquidators saw a need for fairly confined aspects of the winding up of each of the FAI Companies to be placed in the hands of a liquidator who was independent of the remainder of the companies in the HIH Group. That need arose in the context of certain litigation which the existing liquidators proposed to pursue on behalf of certain companies in the HIH Group other than the FAI Companies. The existing liquidators foreshadowed a possibility that the HIH companies may assert causes of action against other persons in circumstances where those other persons might, at some in the course of the litigation, seek to propound cross-claims against one or both of the FAI Companies. The existing liquidators also foresaw a possibility that, depending on the outcome of any such litigation, the HIH companies may need to prove in the winding up of either or both of the FAI Companies.
Justice Barrett held that it was obvious that the existing liquidators could not deal with the possible cross-claims against the FAI Companies in proceedings initiated by the prospective plaintiff HIH Companies, or any proofs of debt that those prospective plaintiff HIH companies might lodge in the windings up of the FAI Companies. He further held that those aspects of insolvent administrations required separate and independent attention. Justice Barrett appointed Mr Stephen Parbery as the special purpose liquidator of the FAI Companies.
In his judgment, Justice Barrett raised the question as to why liquidators, upon encountering such a situation of conflict, should not simply resign and a new liquidator be appointed. Justice Barrett stated:
“One possibility, of course is that the existing liquidators, upon encountering such a situation of conflict, should vacate the field. But that would be highly counterproductive in a case such as the present where application and experience over a period of more than five years has put the existing liquidators in a position of special knowledge that it would be very expensive indeed to replicate in the mind of some new liquidator, assuming that replication were possible at all.”
Conclusion
The Court does not exercise any hard and fast rules in determining whether a special purpose liquidator should be appointed to assist existing liquidators in complex liquidations. The sparse case law on the topic seems to suggest that the Court will make a decision about each appointment on a case-by-case basis. The lesson to be learned for liquidators is to be acutely aware of potential conflicts pre-appointment which could arise later in regard to a particular and discrete issue of the liquidation.
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