The role of a Special Purpose Liquidator is not to investigate conduct of external administrators

Articles Written by Peter Smith (Partner), Lauren Danckwerts (Associate)

Today, the Federal Court dismissed a novel application brought by a disgruntled shareholder and creditor seeking to have a Special Purpose Liquidator (SPL) appointed to investigate the general purpose liquidators’ conduct after urgently selling the company’s assets to the secured creditor during the company’s voluntary administration. The Court also dismissed an alternative application for the appointment of a reviewing liquidator to review the general purpose liquidators’ conduct due to the applicant’s delay in making the application and other discretionary factors.

The decision will be welcome news to insolvency practitioners, with many having previously experienced attacks from disgruntled stakeholders (often many years after the event) over urgent commercial decisions they were required to make during an external administration. Dealing with these stakeholders is often costly and time consuming, particularly where they seek to misuse the rights conferred on creditors by the Corporations Act.

The decision provides considered reasoning to explain that the Court does not have power to appoint a SPL to investigate the conduct of administrators, deed administrators or liquidators because  that is the role of the Courts. The Court also addressed some of the discretionary factors to be considered when asked to appoint a reviewing liquidator, including delay in applying for the relief.

Background

Battery Minerals Resources (BMR) carried out the business of exploration and development for mining of cobalt, lithium and other minerals used in making batteries, and had a Canadian subsidiary of the same name.

On 11 November 2019, the general purpose liquidators were appointed as administrators of BMR by its board. It was immediately apparent to the administrators that there were insufficient funds available to meet the debts of BMR and its subsidiary, ongoing operating costs or to undertake exploration activities, and fund the administration which was required to maintain the value of the Canadian subsidiary. Consequently, to preserve the value of the shares in the subsidiary, the administrators embarked on an urgent sale campaign. After evaluating three bids, including one very uncertain and conditional bid from a shareholder, the administrators agreed to a sale to the secured creditor. Under the transaction, the secured debt was to be offset against the purchase price of the shares. The contract settled within three weeks.

The first plaintiff/shareholder, being a member of the Committee of Inspection representing the second plaintiff/creditor, objected to the sale at the time and continued with his complaints in correspondence to the administrators for some months. He filed his application seeking the appointment of a SPL in April 2021, more than one year after the sale. The second plaintiff was joined thereafter.

The plaintiffs applied for the appointment of the SPL under section 90-15 of Schedule 2 of the Corporations Act (Insolvency Practice Schedule). While courts have appointed SPLs under this provision to investigate and pursue claims arising before an external administration, this was the first case since the introduction of the Insolvency Practice Schedule to consider a proposed SPL appointment for the purpose of investigating the conduct of external administrators in the exercise of their functions. Prior to the introduction of the Insolvency Practice Schedule, the Supreme Court of NSW in Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735 (Honest Remark) held that the Court did not have the power to appoint a SPL to investigate the conduct of a liquidator or administrator because that was within the supervisory function of the Court over its officers.

In respect of external administrations, the Insolvency Practice Schedule empowers the Court to:

  • inquire into the external administration of a company of its own initiative or on the application of specified persons, including creditors and ASIC, and in doing so, require a person involved in an external administration to give information, provide a report or produce a document;

  • make such orders as it thinks fit in relation to the external administration of a company, including making orders in relation to any loss caused by a breach of duty by an external administrator; and

  • appoint a registered liquidator to carry out a review (a reviewing liquidator) into a matter that relates to the external administration of the company.

The Court’s Reasoning

In BMR, Justice Griffiths described the Insolvency Practice Schedule as a uniform code that has extended the supervisory jurisdiction of Courts over liquidators to all forms of external administrations.  Accordingly, his Honour accepted the reasoning in Honest Remark to conclude that ‘the Court does not have power under s90-15 to appoint an SPL to investigate the conduct of the incumbent liquidator either as liquidator or in a previous role as voluntary or deed administrator’. His Honour noted that the reasoning in Honest Remark is strengthened by the Insolvency Practice Schedule as the supervisory powers conferred on the Court by the schedule apply equally to both liquidators and administrators.

His Honour also found that if the Court was empowered to appoint a SPL, he would refuse to exercise the discretion to do so because:

  • it must be demonstrated that the proposed appointment has ‘sufficient utility’ and be ‘just’ for the interests of creditors (at [121]), which the plaintiffs did not demonstrate. 
  • the plaintiffs failed to establish any likelihood that the appointment of the SPL would lead to further recoveries by the creditors, which is necessary for the appointment of a SPL to be of sufficient utility, and to be in the interest of creditors. In short, the plaintiff’s evidence amounted to no more than mere assertions of undue urgency in the sale of the shares and failed to establish that an investigation could lead to a recovery for the benefit of creditors.
  • Courts are reluctant to interfere with decisions of an external administrator, where the administrator is acting bona fide. There was no suggestion in this case that the administrators acted other than in good faith.
  • when the proceedings were commenced, the liquidators were close to making a final distribution to creditors and that distribution would be delayed and the dividends reduced by the appointment of an SPL by reason of the liquidators having to provide assistance to the SPL.
  • unexplained delay in making the application is fatal.

Justice Griffiths also provided guidance on factors relevant to the discretion whether to appoint a reviewing liquidator under s 90-23 of the Insolvency Practice Schedule. His Honour held that the primary consideration is whether the Court is satisfied that it is necessary to investigate the conduct of an external administrator to uphold the public interest in the honest and efficient administration of the company (at [95]). The factors relevant to the exercise of the Court’s discretion include the following:

  • whether the applicant adduced evidence which at least suggests that the external administrators have engaged in conduct which requires regulation, supervision, discipline or correction by the Court (noting that a reviewing liquidator should not be appointed to merely review commercial decisions made by an external administrator acting in good faith); and
  • whether the appointment of a reviewing liquidator would be just and beneficial for the interests of the general  body of creditors – involving considerations of whether the investigations could potentially lead to recoveries for creditors, and the potential for the review to cause further delay or expense in finalising the external administration.

Justice Griffiths dismissed the plaintiffs’ application for the appointment of a reviewing liquidator because:

  • the plaintiffs did not demonstrate that there were matters concerning the conduct of the external administration which required investigation.
  • the appointment would delay the finalisation of the liquidation of BMR, which was not in the interests of the general body of creditors.
  • there was no explanation for the plaintiffs’ delay of over 14 months in instituting proceedings.

Johnson Winter & Slattery acted for the company on instructions of the general purpose liquidators in this case Lewis v Battery Mineral Resources Ltd (in liq) [2021] FCA 963 .

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

Related insights Read more insight

Can boards hide their sensitive side?

A sensitivity analysis can be a useful tool for assessing the likelihood of meeting earnings forecasts. But are public companies bound to disclose that analysis to the market? The Full Court of the...

More
Arrium court finds significant non-current liabilities not sufficient to prove insolvency

In a substantial recent decision arising from the Arrium liquidation , the Supreme Court of New South Wales considered the materiality of significant future liabilities in assessing the company’s...

More
Liquidator vindicated by the Federal Court in the Babcock & Brown liquidation

A hotly anticipated decision in the ongoing saga of the Babcock & Brown liquidation was handed down last week, resulting in another win for the liquidator (represented by Johnson Winter & Slattery)...

More