July 25, 2013

Liquidators Duty of Care on sale of assets

The Federal Court in the recent matter of Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd): In the matter of Bonython Metals Group Pty Ltd (In liq) FCA 349 (“Bonython”) refused an application by an unsuccessful bidder which sought an injunction to prevent the sale of company assets by its liquidator.

There have been numerous proceedings dealing with the actions of Receivers and Mortgagees and their statutory duties associated with the sale of assets. These duties are clearly defined under Section 420A of the Corporations Act 2001 (Cth); however what are the duties of a Liquidator when undertaking the realisation of company assets?

Pursuant to the provisions of Section 420A of the Act, controllers or receivers and managers must take all reasonable care to sell property of a company for not less than market value, or if there is no market value, for the best price reasonably obtainable.

In the Bonython matter, the Liquidators appointment was by way of an order made on 27 February 2012. The Liquidators undertook a sale process for the sale Bonython’s assets including its joint venture interest in a mining tenement near Broken Hill. The sale process included advertising, extensive negotiations with various bidders, and an assessment of the adherence of the proposed bids as against the Joint Venture Agreement’s requirements for the sale of the company’s interest.

The company’s joint venture interest in the mining tenement was eventually sold.

The applicants in this proceeding were the unsuccessful bidders for the company’s asset.

Relying on various grounds for the basis of their injunctive application, including a contention that the Liquidators had breached their alleged duty to achieve the “best possible price” for the asset, the applicants sought an interlocutory injunction to prevent the sale of the company’s joint venture interest in the mining tenement pursuant to the provisions of Section 1321 of the Corporations Act 2001 (the Act).

It would appear that the plaintiffs’ offer, whilst slightly higher than the successful bidder’s offer, was not as commercially favourable to the company or its Liquidators. In this regard, it appears that the successful bidder offered a larger cash component and offered an indemnity in respect of any claims arising out of the Joint Venture Agreement. The offer also provided for a secured guarantee from a separate corporate entity.

The releases and indemnities also, in essence, effectively looked to eliminate any risk that there may be no return to shareholders should a claim arise under the Joint Venture Agreement and the cash component provided an immediate realisation of the asset for the Liquidators .

The successful bidder’s offer also provided for a timelier finalisation of the realisation process.

The applicants contended that Section 420A applied similarly to Liquidators as it did to Receivers and Controllers.

In this matter, the Federal Court usefully explained the approach to be taken when commercial decisions of liquidators, or trustees, often made in difficult circumstances, are challenged and held that Section 420A had no application to Liquidators as Liquidators are not “controllers” of the company.

The applicants failed to establish a prima facie case that the liquidators’ conduct was unreasonable or otherwise defective and as such their application was ultimately unsuccessful.

The Court noted that it is not the case that a Liquidator is under a legal duty to achieve “the best possible price” for the relevant asset (as required of receivers by Section 420A of the Act) but also noted that in line with the Courts general approach when it comes to dealing with matters that relate to the making and implementation of a business or commercial decision, when Liquidators exercise their broad array of powers under Section 477 of the Act, they effectively have a wide discretion and a certain latitude to use considerable business or commercial judgment in determining whether or not to sell an asset and on what terms. The Judge commented that:

“In exercising their powers under the relevant provisions of s 477 of the Act, the Liquidators are subject to some relevant duties, including duties of skill and care and duties owed by a fiduciary to the company, its creditors and its contributories. But they are not “controllers” of the company and s 420A has no application to them”.

The Judge also held that the Liquidators’ decisions should be considered within the obligation of their duty to make practical commercial judgments which often involved the application of business acumen.

The sound commercial reasoning adopted by the liquidators in accepting the successful bid and the contemporaneous evidence of the liquidators’ decision-making process was regarded by the Court as sufficient evidence to support a finding that the liquidators had acted in accordance with their powers under section 477 of the Act.

This judgment bears full reading, including the relevant details surrounding the sale process undertaken by the Liquidators and the evidence given in support of his decision.



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