Liquidator justified in admitting proof of debt by related company

Andrew Barnden, Registered Liquidator and Director of Rodgers Reidy was recently involved in a case where the Court found that he was justified by acting in a quasi-judicial capacity to the standards no less than that of a judge in admitting a proof of debt by a related entity where he is appointed to both companies. The full ARITA article is set out below.

A liquidator has successfully applied for directions to justify the admission of a proof of debt lodged by a related company in circumstances where he is appointed to both companies. The decision of Barnden, in the matter of Masonry Works Pty Ltd (in liq) [2020] FCA 575 saw the Court orders to justify the liquidator’s decision to admit a proof of debt. The application was necessary in circumstances where the liquidator was appointed to both companies in question (which were related entities) and the claim involved intercompany loan amounts between the entities.

Takeaways

The Court has power under s 90-15 of the Corporations Act 2001 (Cth) to make orders justifying the treatment of a proof of debt by a liquidator. Such orders will be necessary where there is a potential for conflict arising from the adjudication of proofs of debt in related companies which could be challenged.

Background

The liquidator was appointed to both Masonry Works Pty Ltd (in liq) (Works) and Masonry Profiles Pty Ltd (in liq) (Profiles). Both companies were placed into liquidation in early September 2014.

The books and records of the two companies recorded an internal loan but there was a difference between the records of approximately $30,000 for the amount of the loan. There was no loan agreement or other documentation recording the loan. The liquidator investigated the intercompany loan and determined that Profiles was a creditor of Works for $505.942.77 (as opposed to the higher amount recorded in the books and records of Profiles).

Given the dual appointments the liquidator applied to the Court for justification of his determination to admit the proof of debt in the liquidation of Works.

Decision

It is clearly established that, in adjudicating proofs of debt, a liquidator acts “…in a quasi-judicial capacity according to the standards no less that that of a judge to determine the true liabilities of the company…”(at [28], referring to Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332).  However, when acting as liquidator of two related companies a conflict arises and, without sanction from the Court, there is a risk of creditors challenging a decision to admit a related party proof.

The decision confirmed the approach of the liquidator and gave orders, pursuant to s 90-15 of the Corporations Act 2001 (Cth) (Act), that the liquidator was justified in admitting the proof. (See [22] and In the matter of Daily Planet Pty Ltd (in liq) [2019] VSC 265).  In reaching this decision Gleeson J was satisfied that “…the liquidator was entitled to the protection of the Court in respect of his intended conduct…” (at [30]).

This conclusion was justified by evidence which showed:

  • the remaining creditors were given notice of the application and none appeared to raised objection or otherwise comment
  • the liquidator had faithfully performed his duties
  • there was a detailed and thorough investigation which had formed the basis of the liquidator’s determination
  • there had been not any relevant failures on the part of the liquidator to comply with the Act, or any order of the Court.

Click here to read the judgement>>

Click here to view the full original article by ARITA>>

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