December 14, 2023

Liquidator Got It Wrong

Okay, I got it wrong. As you know, it can be dangerous to say that as a professional, but I think it’s fair to say that professionals, even the most diligent, will not always be right. So what am I talking about?

The Company’s project had been completed, its plant returned to Perth from site, but the two Directors were in dispute as to how the plant should be realised and the proceeds applied. They came to “agree” that the court should appoint me as Liquidator to deal with the company’s assets and liabilities.

One area of dispute was the events leading up to the termination of employment of the Managing Director (MD). The other Director was not an employee and so he was not on the payroll. Given the project had ended, some run-off issues attended, leaving the main issues being sale of the company plant, settlement of minor liabilities and distribution of a $1M to $2M surplus, it appeared to me that that these issues were equally the responsibility of each Director (general duties) and that the MD’s role must have ceased at some point after the project had ended and before the court made the winding up orders. While the MD had not attended any company/project premises in many months, he asserted that his employment had continued right up until the Court made ordered the winding up.

The MD submitted a proof of debt for entitlement in excess of $400,000. It seemed to me that the claim should be admitted for only a fraction of this sum so a partial admission/partial rejection notice was issued which gave the MD a 21 day period to apply to the Court to set my decision aside and make an alternate adjudication upon the claim.

There was a number of factual and legal arguments, which I’ll keep short for the purposes of this article, but they included:

  • my lawyer’s view that the employment contract had been abandoned;
  • the circumstances around the employment of the Managing Director and how the terms came to be incorporated (or not) into the employment contract – including some tracing of the flow of email correspondence and how the MD had amended the template contract to provide for his termination only by a unanimous decision of the board; and
  • while it initially struck me as odd to have a unanimous decision of the board (of 2 Directors) to remove the MD, would it have been any fairer if the other Director could unilaterally terminate the MD’s employment?

The other Director had himself added as a party to the proceedings and there were some tense times in court while the parties tested each other on the terms of the MD’s contract.

This case is arguably a classic shareholder dispute case and hopefully a reminder that there are multiple ways to interpret the same set of facts, so parties should try to be pragmatic, seeking the middle ground where possible.

The Supreme Court Master was not playing King Solomon. In a judgment that referenced Goldilocks and the Three Bears, the Master found in favour of the MD, directing me to admit the claim in full, to pay the MD’s costs. I count myself lucky that the Court found that my costs ought properly be paid from the assets of the company too. The other Director paid his own costs and had his shareholder distribution reduced as a result of all of the other costs being paid from the winding up of the company.

As an unstated gesture of good faith, I undertook the final component of the file at no charge, a 25% write-off on the job. It was the right thing to do in that case. The Liquidator and legal fees consumed 10% of the available assets – a good result compared to many liquidations, however, time again, I suspect both Directors/Shareholders would have preferred a no cost outcome over this one.

What can you takeaway from all of this? Liquidator proof of debt determinations are sometimes black and white, representing a “quasi judicial determination by an Officer of the Court” while other times it would be prudent to obtain legal advice and consider whether an appeal to the Court is the right course of action for the Creditor. A deal may be capable of negotiation which is a better outcome for all Creditors!

At SV Partners we are always happy to discuss your client’s scenarios and the options available to them.

Article written by Malcolm Field (Director) – Perth

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