Section 420A of the Corporations Act 2001 (Cth) (Act) obliges a receiver exercising a power of sale to take all reasonable care to sell the property for market value or the best price reasonably obtainable. This is typically a heavy duty.
Liquidators are not subject to section 420A of the Act. Although liquidators remain under statutory and fiduciary obligations when selling company property in a liquidation, generally the standard of conduct required of a liquidator is less onerous than under section 420A and liquidators have the benefit of more latitude in matters of commercial judgment. This makes it challenging to contest the decisions of a liquidator when selling company property.
Duties on the liquidator
Liquidators are officers of the company: section 9 of the Act. This means that the statutory duties that apply to directors in managing the company also apply to liquidators. Those duties are:
- a duty to exercise care and diligence that a reasonable person would exercise if they were an officer of the corporation in the corporation’s circumstances and had the same responsibilities as the officer (section 180 of the Act);
- a duty to act in good faith in the best interests of the corporation and for a proper purpose (section 181 of the Act);
- a duty to not improperly use their position to gain an advantage for themselves or someone else or cause detriment to the company (section 182 of the Act); and
- a duty to not improperly use information that the liquidator has received because they are a liquidator of a company to gain an advantage for themselves or someone else or cause detriment to the company (section 183 of the Act).
In addition, liquidators have a specific duty to use their own discretion to act in the best interests of creditors in the management of the affairs and property of the company and the distribution of its property (section 477(6) of the Act).
Standard of conduct
Overall, the standard of conduct required for a liquidator in selling company property is lower than the standard of conducted required of a receiver under section 420A of the Act. The Court has held that the duties imposed on officers under the Act are not as stringent as the 420A duty on controllers exercising a power of sale: Jeogla Pty Ltd v Australia and New Zealand Banking Group Ltd (1999) 150 FLR 359.
In addition, the Court will generally defer to the commercial judgment of a liquidator unless it can be shown that the liquidators is acting in bad faith. The Court recognises that liquidators have a very broad discretion in how to use their powers under the Act: Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd) [2013] FCA 349. This makes the Court reluctant to second guess a liquidator when a plaintiff seeks to challenge a decision of a liquidator based on the liquidator’s commercial judgment: Re Mineral Securities Australia Ltd (In Liq) [1973] 2 NSWLR 207 .
This is not to say a liquidator can never breach their duties under the Act. A liquidator could breach their duties under the Act if the liquidator does not implement a proper sale process and as a result company property is sold at an undervalue (breach of a liquidator’s duty to exercise care and diligence under section 180) or if the liquidator prefers a lower offer over a higher offer for an asset unreasonably or for ulterior reasons (breach of the liquidator’s duties to act in good faith and for a proper purpose under section 181). However, these cases are likely to be rare for a well advised, competent liquidator.
Key takeaway
Liquidators are not subject to section 420A duties but they are subject to other duties under the Act. In determining whether a liquidator has breached their duties under the Act, the Court’s give commercial deference to liquidators and their commercial judgments. The commercial decisions of a liquidator who acts in accordance with best commercial practice and advice from appropriate experts are difficult to challenge. For these reasons, it is not easy to challenge a liquidator’s decisions in selling company property. It also makes sense for lenders to work with liquidators to sell assets rather than attempting to sell via a receivership or as mortgagees in possession.
If you would like to discuss this article with us, please contact David Greenberg, partner, or Victoria Caldwell, Senior Associate on (02) 9261 5900.