September 13, 2017

Does your Choice of Liquidator Even Matter?

You are a solicitor acting for a client who is owed money from a corporate debtor. You have issued a statutory demand which has expired and now it’s time to take the next step and commence winding up proceedings. Does it matter which liquidator you approach to obtain their consent to act?

You could be forgiven for assuming that it makes no difference who you choose (other than who’s Christmas card list you may find yourself on) as all liquidators are bound by the same statutory duties under the Corporations Act 2001 (Cth), such as lodging a report with ASIC as to any possible offences committed by company officers, conducting reasonable investigations to determine the existence of voidable transactions, and realising any identified assets. But a liquidator’s role is not absolute, black and white or one size fits all. Five different liquidators may well take five different approaches to administering a winding up.

There are a number of factors to consider in choosing your knight in shining armour (perhaps the first time a liquidator has been referred to as such, but then again, I am bias) which may influence the outcome of the liquidation and certainly your (and your client’s) experience throughout the process:

1.Will your chosen liquidator be more than a ‘desk-jockey accountant’?

It is an absolute certainty that the petitioning creditor will have an expectation that the liquidator will undertake a thorough investigation into the company’s affairs. There is often a vast amount of information that can be obtained while sitting behind a computer screen. However, to answer some of the most basic questions it may require staff to do what is so often dismissed; get out of the office and inspect things for themselves.

It may be that the company’s business premises need to be visited to conclusively determine whether it is still trading, whether there are still company assets identifiable and whether any records can be recovered to assist with further investigations.

Now, there will be some liquidations where it is not practical or necessary for the liquidator to pound the pavement; such as companies that operate entirely online, ceased trading some time ago or otherwise had no physical presence, such as a corporate trustee of a trust holding no tangible assets. But, justifiably, creditors should be able to expect a liquidator to conduct physical inspections where it may be beneficial to the administration.

2. How vigorously will transactions be investigated when there is no money in the kitty?

It would be lovely if the norm saw a pot of gold awaiting the liquidator’s arrival (on his/her white stead perhaps) to liberate it and apply it toward conducting investigations and distributing to creditors. Sadly, this is somewhat uncommon.

However, a liquidator will still undertake investigations into such transactions as unfair preference payments, uncommercial transactions, unreasonable director-related transactions, as well as insolvent trading. The extent to which a liquidator must go to conduct such investigations is not specifically defined, other than to say the liquidator should undertake reasonable enquiries and measures to determine the assets and liabilities, and seek responses from the directors.

This is an area where there are often differences in the approaches taken by different liquidators. Typically, low hanging fruit will always be identified and dealt with, but often where no such opportunities exist, it could be the end of the road if a conservative, limited-scope approach is being taken.

Pushing the status quo can reap rewards. As mentioned in point 1 above, investing the time to conduct physical inspections can uncover important information, as can calling in the directors to be interviewed, obtaining and going through email records, and speaking with creditors. Updates from your chosen liquidator should discuss what measures have been taken to conduct investigations.

3. To what degree will the liquidator and his/her staff apply a healthy dose of professional scepticism when dealing with office holders of the company?

Unfortunately, in this business, you come across characters on a regular basis who are gifted with their application of the truth. Challenging and verifying the information received, particularly from company officeholders who often have the most to lose / at risk, is a critical component of the role. Failure to do so may result in company assets not being identified or potentially voidable transactions not being challenged and pursued.

4. Will trading a business be considered as an option by the liquidator?

A liquidator has the power to carry on a business of a company so far as is necessary for the beneficial disposal or winding up of that business. Court-appointed winding ups can pose challenges to trading a business, for reasons such as there is no restriction on lessors to exercise their property rights like in a voluntary administration (eg lock you out of the business premises), and that the company’s management are often less receptive to working with the liquidator to achieve a favourable outcome.

However, certain circumstances can arise where the carrying on of a business, to enable a sale as a going concern or to sell the remaining stock on commercial terms, will achieve a more favourable outcome for creditors. If the liquidator is unwilling to leave such an option on the table, preferring the shut-down scenario in 100% of cases, then this limits the outcomes that can be achieved for your client and the full body of creditors.

It should not be overlooked however, that there is an inherent risk to the liquidator in carrying on businesses and I would not personally criticize a liquidator for choosing to not trade a business – ultimately it is their prerogative and reflects their appetite for risk. I merely highlight a need for those seeking to instruct a liquidator to be aware that not all liquidators will consider carrying on a business or have expertise in this field.

5. What level of reporting will you receive from the liquidator, as the petitioning creditor’s solicitor, providing an update about the liquidation?

Up until 1 September 2017, in a court liquidation, a liquidator has not been compelled to provide any reports to creditors, ever! That sounds a little astonishing, right. The recent Insolvency Law Reform Act 2016 now requires an Initial Notice be issued to creditors within 20 business days of the appointment (likely containing very limited specific information about the liquidation) and a Statutory Report within 3 months. But a petitioning creditor who has tipped in a not insubstantial amount to wind up the company, may be somewhat underwhelmed if their knight in shining armour turns into the town mute following their appointment and is treated as simply one of the crowd.

Accordingly, it is important to outline your expectations (and your client’s expectations) to the liquidator prior to, or upon, the appointment. As a guide, it is reasonable to expect the liquidator to furnish you with an exclusive and tailored update on at least two occasions during the infancy of the liquidation. Further updates may be warranted on an ongoing basis depending on the nature of the liquidation.

6. Does the firm have a local presence in the region where the company carries on a business?

A local presence can enable many of the above to be undertaken effectively and efficiently.

How did your last liquidator perform? As you will know, you cannot build a reputation based on what you say you will do. The proof will ultimately be pegged on how well the promises reflect the reality. If you would like to discuss our approach to court liquidations, or any insolvency matters, with one of our directors, please contact SV Partners on 1800 246 801.

Article written by Matthew Bookless

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