Conflicts of interest and the removal of liquidators

Insolvency eBulletin - 2 May 2013

Summary

A liquidator is entrusted with an important function in a company’s liquidation or voluntary winding up. The amount of debt a creditor is able to recover is dependent on the liquidator acting with - and being seen to act with - complete impartiality and in the best interest of all the parties interested in the property and liabilities of the company.

In this eBulletin, we revisit the key fiduciary duties of a liquidator as the agent of the company under liquidation, and consider the issue of a conflict of interest and when this might arise. We also look at who is able to request that a liquidator be removed on the basis of a conflict of interest.

 

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Liquidator’s fiduciary duty

A liquidator's primary objective is to collect and realise the company's assets for the benefit of those interested in its winding up. The liquidator is either regarded as a court officer, in the case of a compulsory winding up, or an agent of the company in the case of a voluntary winding up.

As the agent of the company, the liquidator occupies a fiduciary position in some respects. As such, the liquidator has a duty to act honestly in the exercise of their powers for the proper purpose for which they are conferred and not for any private or collateral purpose.

Importantly, liquidators must not allow their private interests to come into conflict with their duty as a liquidator. They must act with complete impartiality at all times in relation to the various persons interested in the property and liabilities of the company.

The overriding consideration for a liquidator must always be the promotion of the best interests of all the individuals whose competing interests are involved in the winding up. There should be no preference - perceived or otherwise - for or against any individual whatsoever. In general, the liquidator has a duty to the whole body of shareholders, to the whole body of creditors, and to the court.

 

Conflict of interest

A liquidator's failure to observe complete impartiality in the exercise of its duties may give rise to a perception of a conflict of interest that warrants removal of that liquidator.

To date, the courts have taken an objective approach in determining conflicts of interest, as shown by the cases of Re Biposo Pty Ltd1 and Singtel Optus Pty Ltd v Weston,2 where the court held that if a reasonable observer would have perceived that the liquidator showed a tendency to favour certain interests at the expense of others, there is prima facie a conflict of interest. Liquidators should be aware that it is not only important to remain independent in a winding up, but that you must also be seen to be independent.

A court will also take into account whether it is in the best interests of all creditors that the liquidator be removed. For example, a conflict of interest does not necessarily arise simply because more than one company in a group is being wound up by the one liquidator, as it is often convenient for the same liquidator to be appointed for each company in this circumstance. In general, the court will only replace a liquidator where there is a real prospect of conflict arising between the liquidator's personal interests and its duty to act exclusively in the interests of creditors.

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Removal of liquidators and "standing"

Liquidators can only be removed when there is a "cause shown" to justify their removal. In the case of BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq),3 it was held that a "cause shown" is measured by reference to the "real, substantial, honest interests of the liquidation". In other words, cause is shown for removal of the liquidator if the court is satisfied that it is in the best interest of (or for the better conduct of) the liquidation and the general advantage of those interested in the assets of the company.

In order to apply to the court for the removal of a liquidator, the applicant must have "standing" under section 503 of the Corporations Act 2001, ie the person must be an "interested party". An "interested party" is any person whose rights and interests will be directly affected by the liquidator's actions in performing his or her duties under liquidation. This is supported by the court in Re Greight pty ltd (in liq), Re Stafford Services Pty Ltd (in liq) and Handberg and Another v CANT and Others,4 which held that any person with a real interest in the winding up of a company has standing to apply for the removal of a liquidator. Examples of interested parties include secured creditors, unsecured creditors, directors and any related parties to the winding up.

 

Examples of conflicts of interest

Conflicts of interest can arise in a number of situations. A possible consideration is the scenario where a liquidator has been appointed to administer two related companies where one company might be liable to disgorge funds to the other and the liquidator is placed in a situation where a particular creditor is favoured over all others. In Re Nuhan Ltd,5 the court found that where one company in the group has a claim against another, or where there are likely to be disputes between the companies, the appointment of a different liquidator for each of the companies was a more appropriate practice.

The Supreme Court of New South Wales in BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq)6 (Hypec) considered a similar scenario where a liquidator conducted the liquidation in favour of the company's substantial creditor to the detriment of the company, and where it was apparent that the default judgment obtained by the creditor was obtained by fraud. It was held that the liquidator had a duty to the company and the liquidator's association with one lot of interest over the interests of the company was to the detriment of impartiality. The liquidator was removed on this basis.

The Supreme Court in Hypec also noted that it is a well established principle that removal of liquidators is not confined to the personal unfitness, impropriety or breach of trust on the part of the liquidator. Cause is shown if the applicant can point to any conduct or inactivity on the liquidator's part that provides a basis for the removal of the liquidator, ranging from moral turpitude to bias or partiality, lack of independence, incompetence or other unfitness for office.

Conflicts of interest may also arise in the following situations: 

  • where the liquidator has been associated with officers of the company or others whose conduct the liquidator must investigate. For example, this situation existed in the case of Re Giant Resources Ltd,7 and the court held that a conflict of interest existed; 
  • where the liquidator has a claim against or debt to the company. In Re Giant Resources Ltd, the court held that this is a clear example of a conflict between the personal interests of the liquidator and that of the creditors; and 
  • where a close business relationship exists from the outset between the liquidator and the directors of the company being wound up. For example, it was found in Re G K Pty Ltd; Ex parte Deputy Commissioner of Taxation8 that such a relationship would make it particularly inappropriate that the liquidator had accepted appointment as liquidator of the company. 

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Implications for liquidators

Liquidators should be mindful of:

  • any real prospect of conflict arising between their personal interests and their duty as a liquidator to act exclusively in the interests of creditors; and 
  • the likelihood of conflict arising between companies (within a group of companies under liquidation) that are under the control of the liquidator.

It is best practice that once the likelihood of conflict becomes apparent, the liquidator should seek to remove themself from that liquidation. Otherwise, it paves the way for any interested party (such as a creditor) to apply to the Court for the liquidator to be formally removed.

 

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Further information


1 (1995) 17 ACSR 730 
2 [2012] NSWSC 
3 [2004] NSWSC 1119 
4 [2006] FCA 17 
5 (1980) 5 ACLR 69 
6 [2004] NSWSC 1119 
7 [1991] 1 Qd R 107 
8 (1983) 7 ACLR 633

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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