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The case of Australian Securities and Investments Commission v A One Multi Services Pty Ltd (No 3) [2024] FCA 1209

External administrators are often appointed through existing professional relationships between them and the applicants for appointment, or more accurately their solicitors. Does this practice put the duties of independence at risk?

Facts

In 2021, Mr John Lindholm and Mr William Colwell of KPMG were appointed as receivers to the property of A One Multi Services Pty Ltd. The receivers had not yet made any meaningful recovery at the time of the hearing of the application, although some significant recoveries were expected to occur in the near future.  ASIC brought an application to wind up A One and appoint liquidators to A One. The issue before the Court was who should be appointed as the liquidator.  ASIC contended for new persons to be appointed the liquidators of A One, not the receivers.  The receivers sought to be appointed liquidators anyway.

The receivers directed the Court’s attention to a number of matters which might justify their appointment as the liquidators:

  1. following the receivership, the receivers were already familiar with the company’s financial circumstances; and
  2. the schedule of costs of the proposed liquidators nominated by ASIC were more expensive than the receivers’ schedule of costs.

ASIC’s response to the above points by stating that:

  1. the receivers had a potential conflict of interest as liquidators because the receivers had accrued substantial fees in the receivership of A One and the receivers were asserting a lien over A One’s assets. If the receivers were appointed liquidators, the receivers would be reviewing their own claim in the liquidation, including the enforceability of the receiver’s lien;
  2. it does not matter that the receivers already have the benefit of knowledge of the company’s affairs because the receivers were required to provide assistance should the liquidators require it pursuant to section 530A of the Corporations Act 2001 (Cth); and
  3. the different scale of costs should not be overstated. The more expensive liquidators may be more efficient, resulting in cost savings whilst the cheaper ones may be less efficient, resulting in an overall higher cost. ASIC also pointed to the conduct of the receivership, which had taken a number of years, in support of this proposition.

Points raised by the Court to consider

In considering the issue of the identity of the liquidators, the Court made the following notable comments:

  • prima facie when an application is made for the winding up of a company, it is generally assumed that the person nominated by the applicant to be the liquidator will be accepted;
  • notwithstanding the prima facie position, the appointment always remains at the discretion of the Court;
  • past experience has shown that adherence to the statutory duties required of liquidators is often abdicated in favour of the pursuit of a profitable administration for the external controller;
  • there is tension between liquidators’ duty to creditors and a desire to maintain referral relationship with regular applicants for winding up, in particular their lawyers; and
  • it may be time for the Courts to develop a new process for the appointment of external administrators, being one that is not founded upon deep-rooted relationships and associations between the external controllers and the applicants for appointment (i.e. their lawyers).

Decision

The Court agreed with ASIC that the receivers have a potential conflict of interest.

A compelling reason was that the receivers claimed a substantial amount owing to them from the receivership. If they were appointed as the liquidator, they would have to consider the veracity of their own claim, and there exists a potential for a real conflict of interest.

Key takeaway

Liquidators must be both independent and appear independent to an outside observer to maintain the Court’s confidence.  If a liquidator fails to maintain their independence or the appearance of independence, the Court is more likely to listen to a creditor who objects to a liquidator being appointed because of the liquidator’s prior association with the company. This reflects section 532(2)(b) of the Corporations Act 2001 (Cth) which provides that a person must not, except with leave of the Court, seek to be appointed to act as liquidator of a company if they are a creditor of the company in an amount exceeding $5,000.

Practitioners should be mindful of any potential conflict of interest and take steps to address the potential conflict before seeking to be appointed liquidators by the Court.

 

If you would like to discuss this article with us, please contact David Greenberg, partner, or Alison Chow, Associate on (02) 9261 5900.