Court endorses close oversight of conduct of liquidation by priority creditors including FEG and GEERS

4 June 2019
Kimberley Arden, Partner, Brisbane

In the matter of 1st Fleet Pty Ltd (in liquidation), the Commonwealth applied for orders that the liquidators of 10 companies in liquidation provide specific information and/or produce certain documents to the Commonwealth. This request related to the validity of the constitution of and certain steps taken by the Committee of Inspection and the reasonableness of the liquidators’ remuneration. The New South Wales Supreme Court helpfully clarifies the circumstances in which a request for documents or information is “not reasonable” and also whether the liquidators’ electronic time recording records are required to be produced.

Recently, the Commonwealth issued proceedings in the Supreme Court of New South Wales seeking orders that the Liquidators of 10 companies in liquidation (Group Companies), provide specific information and/or produce certain documents to the Commonwealth with respect to 2 aspects of the liquidation, being:

  • The validity of the constitution of and certain steps taken by the Committee of Inspection (COI); and
  • The reasonableness of the Liquidators’ remuneration.[1]

 

Relevant events

Date Events
22 May 2012 The Liquidators were appointed liquidators of the Group Companies.
Various Commonwealth via GEERS and FEG advanced $9,444,014 to employees of the Group Companies.
Various dates between
22 May 2012 and 11 August 2017
The COI approved various amounts of the Liquidators’ remuneration for the period 25 April 2012 to 1 July 2018 in the amount of $4,443,617 (incl. GST) (Remuneration Resolutions).
14 June 2017 and 20 April 2018 The Commonwealth made a series of requests for documents/information.  Various pieces of information/documents were produced by the Liquidators.
24 August 2018 Solicitors for the Commonwealth wrote to the Liquidators expressing concerns as to whether the COI had authority to pass the Remuneration Resolutions and as to whether the quantum of the remuneration claimed was reasonable within the meaning of section 504(2) of the Corporations Act 2001 (Cth) (which was the relevant section for remuneration determinations made before 1 September 2017) and requesting further information (Litigated Request).
7 September 2018 The Liquidators’ solicitors wrote to the Commonwealth’s solicitors setting out that the Liquidators “consider that it is not reasonable to comply with the Commonwealth’s request“.
28 September 2018 The Commonwealth issued proceedings against the Liquidators seeking orders that the Liquidators provide specified information and produce certain documents to the Commonwealth.

Relevant law

The Insolvency Practice Schedule (Corporations) (IPSC) (section 70-45) gives individual creditors the right to request certain information from an external administrator and the external administrator must comply with the request unless a specified exception applies, for example, if compliance is “not reasonable“.

What is “not reasonable” includes:

If the external administrator “acting in good faith, is of the opinion that“:

  1. there would be substantial prejudice to the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying;
  2. the information is privileged;
  3. disclosure would result in a breach of confidence;
  4. insufficient funds are available to comply;
  5. the information has already been provided; or
  6. the request is vexatious.

There are further provisions in the IPSC (s. 70-55) giving the Commonwealth a right to request information if either an employee of a company under external administration has made a claim for financial assistance from the Commonwealth regarding unpaid employment entitlements or the Commonwealth considers that such a claim is likely to be made. Again, the external administrator must comply with the request subject to the identified exemptions.

 

Requests for information – COI

Here, the Commonwealth sought information available to establish certain matters including:

  • Whether the resolution to appoint the COI (COI Resolution) was valid;
  • Whether members of the COI were eligible unsecured creditors at the time of the COI Resolution; and
  • That the Remuneration Resolutions were not invalid for being resolutions that were made on the motion or vote of a representative of a person who was not eligible to be appointed to the COI.

 

The decision – COI

The Court found that the Litigated Request was, with respect to the issue of the validity of the COI, unreasonable for the reasons submitted by the Liquidators, which included that:

  • The use of the word “establish” seeks to require the Liquidators to “prove” a proposition the Liquidators did not advance.
  • The categories sought had been “significantly reformulated” from those in the Litigated Request and therefore there had been no failure to comply with such a request as it was never made of the Liquidators.
  • The Liquidators had confirmed to the Commonwealth in correspondence to their solicitors and in oral evidence that “the Liquidators have made appropriate searches and there are no further documents to be produced, so far as they are aware, falling within that category, beyond what they have already produced“.

 

The Liquidators’ submissions – remuneration

The Liquidators’ submitted (amongst other things) that:

  • A relevant paragraph of the Originating Process did not include a request for information and documents, only information;[2]
  • The time entries did not constitute a “breakdown of the calculation of each remuneration payment” but were only “raw data“;
  • The reports provided to the COI for voting purposes were sufficient (despite the fact that a number of the Remuneration Resolutions approved remuneration in advance of the work occurring);
  • Section 70-45 should be read as narrower in scope than section 70-55 on the basis that it was “enacted principally to assist the Commonwealth in the investigation and determination of claims by former employees of insolvency companies for financial assistance in relation to unpaid employee entitlements“.

 

The decision – remuneration

In rejecting the Liquidators’ submissions, the Court ordered that the Liquidators’ electronic time recording records, subject to those records being redacted with respect to any entries which are subject to legal professional privilege, were to be produced to the Commonwealth.

 

Liquidators should:

  • Note that the Court is of the view that it is open to a priority creditor, particularly the Commonwealth, to keep a close eye on all aspects of a liquidation and efforts to do so by a multitude of requests for information and documents does not necessarily mean those requests will be considered vexatious; and
  • Carefully consider the nature of the request and obtain legal advice when in doubt.

[1] In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6.

[2] Justice Black granted leave to the Commonwealth to amend the relevant sub-paragraph of its Originating Process to include a request for documents as well as information.

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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