There continues to be doubt about the validity of certain Committees of Inspection (COI) established during a liquidation and the approvals given by them. Another decision of Pritchard J in the Supreme Court of Western Australia reinforces the potential risk to liquidators relying on COI approvals in the scenario where no separate meetings of creditors and contributories (i.e. shareholders) are held to approve the establishment of a COI.
Liquidators relying on the approval of such a COI may be exposed in relation to fees, acts or other commercial decisions because such approval may not be valid. This clearly creates an unacceptable risk and may lead to commercial uncertainty.
Section 548 of the Corporations Act 2001 (Cth) (the Act) provides that the liquidator must at the request of either a creditor or contributory convene separate meetings of creditors and contributories for the purpose of determining
(a) whether a committee of inspection should be appointed, and (b) where a committee of inspection is to be appointed —
Pritchard J in Re Great Southern Ltd (in Liq) [2016] WASC 234; Ex parte Jones and in Re The Bell Group Ltd (in liquidation); ex parte Woodings [2015] WASC 88 concluded that s 548(1) required the liquidator to hold separate meetings of the creditors and of the contributories to determine whether a COI should be established and, if so, the number and identity of the COI members, irrespective of whether a request to hold separate meetings had been received.
This construction means that a liquidator’s failure to hold separate meetings of the creditors and contributories amounts to a contravention of s 548 of the Act, leaving the liquidator exposed if he or she has relied or acted upon the acts, decisions and resolutions of the invalidly appointed COI.
This is a clear departure from the conventional view on the matter. The decisions also conflict with an earlier 2014 decision in the Federal Court in Re Owen [2014] FCA 1008 which held that a liquidator was only required to hold separate meetings of creditors and contributories if so requested.
Where a matter requires Court, COI or creditor approval under the Act, liquidators remain exposed to the risk that any approval obtained from a COI appointed only by creditors will not be valid.
Until the position is finally resolved through the appellate Courts or legislative reform, liquidators should consider taking steps to remove any doubt about “whether the liquidators would be justified in acting on the basis that the decisions reached by the Committees of Inspection were [or are] validly made”. This may involve convening a meeting of contributories if practicable, cost effective and not likely to give rise to a need for an application under s 548(2) of the Act. Alternatively, liquidators should consider making an application for orders similar to those made in Re Great Southern Ltd and Re Owen pursuant to ss 511 and 1322(4)(a) of the Act to cure potentially defective appointments.
Johnson Winter & Slattery acted on the matter of Re Owen and can advise on the best strategy to address this issue and how to protect a liquidator’s position. Please contact Toni Vozzo, Partner, should you require further information.
Find out more about our Insolvency team here.
A more comprehensive version of this aricle has been published in the Insolvency Law Bulletin Volume 17(9-10).