Liquidators’ Loss Of Office
In the case of Gadsden v MacKinnon (Liquidator), in the matter of Allibi Pty Ltd (in liq) [2023] FCA 647 (“Gadsden”) the Liquidators’ loss of office flowed from their $69 million demand of Directors that the judge did not endorse.
This case highlights the tightrope a Liquidator sometimes might walk.
The judge said he was emphatic in his disagreement with the Liquidators who said there were no grounds for their removal due to the $69 million demand. However, the Court said:
A problem for Liquidators is they enter office as strangers and if information is incomplete and unlikely to be forthcoming then at some point the gloves may have to come off. It might be reasonable and necessary to run with what you have because no more evidence is likely to be assembled at pre action stage.
This appeared partly recognised by the Court:
It is of course true, as McPherson and Pincus JJA, and Derrington J said in Re Qintex Group Management Services Pty Ltd (in liq) [1997] 2 Qd R 91 at 94-95, that liquidators “when they are appointed labour under the particular disability of not knowing as much about the affairs of the company as former directors and others, and that they often cannot obtain reliable information about suspicious transactions” and that they may be confronted with information in the books and records of the company that contain “contrived explanations” or “distortion[s] by persons not anxious to disclose what they really know about events that took place when they were in charge of the company’s affairs”. It is also sometimes the case that directors “are often unwilling and unco-operative witnesses especially in matters in which they are the target of proceedings brought by the liquidator”. And as the court also said in that case, “[f]ew other litigants suffer to that disadvantage, or to the same extent, as liquidators”. See also Grosvenor Hill (Qld) Pty Ltd v Barber [1994] FCA 921; (1994) 48 FCR 301 at 306 (Beaumont, Spender and Cooper JJ).
A $69 Million Demand
However, in Gadsden, the complaint seems to have been the Liquidators may have made positive assertions that the Court suggested they could not make out:
As was submitted by the plaintiffs, they were allegations and claims – very serious ones – for which no proper foundation was, or has been, proffered.
The Liquidators suggested it was common practice to identify potential claims early in a Liquidation and then issue letters of demand from which the nature and scope of the claims may vary after further investigations:
In his first affidavit at [51], Mr MacKinnon gave the following explanation for sending that letter:
It is my usual practice, and to my knowledge that of the fellow Registered Liquidators at my office, and common practice in the industry, for liquidators to identify potential claims at an early stage in a liquidation, and issue letters of demand in respect of them. These claims represent potential assets of a company in liquidation, and it is important and usual practice to identify and commence demand of them, as an early priority in the liquidation process. Often this may occur a year or more before recovery proceedings are eventually issued, especially claims against directors. In my experience it is not uncommon for the scope and even the nature of the claims to alter between the time of demand and the time that proceedings (if any) are issued, due to discussions with and information and documents received from the directors or other potential defendants, and the development of investigations in the liquidation.
Liquidators Are Officers Of The Court
The Court it seems was concerned about the deployment of the spectre of litigation to obtain a collateral advantage not being the proper purpose of legal proceedings and may amount to an abuse of process:
In this case, it seems to me a clear abuse of process to make what was, on any view, an unjustified demand for the payment of $69m, in circumstances where the liquidators insist, even now, that “it would have been quite obvious to [the plaintiffs] that the claim would be limited to the quantum of proven debts at the time of the transfer of the Billi Business” (which they said was $497,723.20). Quite how it is said that a formal demand for $69m, with an accompanying threat of legal proceedings and a reporting of the alleged contraventions to ASIC if the amount was not promptly paid, was supposed to be read as being a demand for $497,723 was not adequately explained.
…
Those answers, and the submission advanced on behalf of the liquidators in closing submissions, suggest that the liquidators believed and still believe that it is appropriate to issue letters of demand by way of ambit claims. That is assuredly not so.
…
Because liquidators are officers of the court it is axiomatic that they should not make demands for the payment of large sums of monies, founded on asserted causes of action for which there is no proper basis. The litany of matters sought to be invoked now to justify the $69m demand listed at paragraph [101] above only make matters worse, because they do not, individually or collectively, form a proper or sufficient basis for the making of the demands in the 30 August 2022 letter. The obligation to identify “possible recovery actions” required by the IPSC does not, as the liquidators submissions seem to suggest, mean that they can make serious but purely speculative allegations (here, against directors under multiple provisions of the Corporations Act) in the hope that they may bear fruit or drive the directors to the bargaining table.
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But the fact that liquidators are often placed in that difficult position is a reason that they are conferred with special powers, for example, to summons directors to give evidence. It does not mean that they are excused from compliance with rules applicable to all officers of the court, including rules and standards that govern the threat, initiation and conduct of legal proceedings. And it does not mean, as the cases make clear, that they can act oppressively or harshly, by seeking to exert pressure, with the spectre of legal costs, or causing undue embarrassment and the like (including here, by making a threat to “report” the contraventions to ASIC).
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