Australia: Liquidators and long-term contracts: the importance of court approval
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This week’s TGIF examines the recent Federal Court ruling in Alfonso, in Pinnacle Fire Protection Pty Ltd (in liq) v Woods  FCA 1402, where the liquidators sought court approval to enter into a long-term settlement agreement.
Key points to remember
- Prompt liquidation is, in general, in the best interests of creditors. However, in some cases, liquidators may need to enter into long-term agreements that could slow down the liquidation. Before doing so, the liquidator must obtain the approval of the court, the inspection committee or the creditors.
- When the court is called upon to approve such an agreement, it shows deference to the business judgment of the liquidator. The court will only ensure that there is no error of law, that the liquidator has acted in good faith and decorum and that the agreement is compatible with a rapid and advantageous liquidation.
- Court approval of a long-term arrangement does not relieve the liquidator of liability if a creditor later challenges the merits of the arrangement. Liquidators should, as always, be careful to assess the commerciality of any long-term arrangement.
Pinnacle Fire Protection Pty Ltd (Mountain peak) was put into liquidation in September 2019. Its main creditor was the Australian Tax Office. One of Pinnacle’s main strengths was a claim against its former manager, Darren Woods (Woods) for breach of his duties as a director by withdrawing funds from the Company’s accounts for his personal expenses. The claim was for $ 310,336.56.
By a court order issued in August 2021, Woods placed $ 116,438 in trust as security for Pinnacle’s claim. His only other significant assets were $ 30,000 in cash and a share of the proceeds from the sale of his marital home. This sale proceeds were tied up in a lawyer’s trust account pending resolution of a family law proceeding.
The liquidators reached a settlement with Woods for $ 175,000. Woods did not have enough cash to pay this amount immediately. As such, the settlement agreement required Woods to pay $ 116,438 immediately and pay the outstanding amount when his family law dispute was resolved. It was not known when this dispute would be resolved, but it was likely to last at least three months.
Request for approval to enter into a settlement agreement
The liquidators requested approval to enter into the settlement agreement under section 477 (2B) of the Companies Act 2001 (Cth) (the act). Under this provision, liquidators must obtain the approval of the court, the inspection committee or the creditors before entering into any agreement the execution of which could take more than three months.
What did the court decide?
Cheeseman J ultimately gave court approval for the liquidators to enter into the settlement agreement.
The factors that the Court should consider before giving its approval are not set out in the Act. Instead, His Honor relied on the authority of Regarding One.Tel Limited  NSWSC 457 (Such).
The court does not approve the underlying transaction
In Such, Justice Brereton described the principles applicable to section 477 claims. His Honor noted:
- the role of the Court is not to reconsider every issue that the liquidator has considered, or to suggest alternative courses of action;
- instead, the court will take due account of the liquidator’s business judgment and knowledge of the liquidation; and
- the Court need only ensure that:
- the liquidator has not committed an error of law;
- there is no reason to suspect bad faith or irregularity; and
- the relevant agreement is compatible with the speedy and advantageous administration of the liquidation.
Therefore, the role of the Court in considering a section 477 claim is limited. In this sense, requests under section 477 differ, for example, from requests for judicial advice where the Court will consider the proposal more carefully.
Under section 477, the court simply authorizes the liquidator to take the action he proposes, it does not give his approval for the underlying transaction itself.
Approval does not exempt the liquidator
As a result, the consequences of obtaining court approval are more limited: approval does not exempt the liquidator from liability for the transaction. As such, creditors can always challenge the actions of the liquidator in future proceedings.
Cheeseman J noted that the liquidators had obtained legal advice and had proven that the settlement would provide more funds to the company than would otherwise be available. His Honor noted that the settlement would prolong the liquidation but that the benefit to the creditors would outweigh the expense of the delay.
The liquidators did not seek the advice of the ATO (Pinnacle’s main creditor) before seeking court approval. His Honor accepted the liquidator’s testimony that turning to the ATO could significantly delay the liquidation and that the ATO was also unlikely to receive a significant portion of the settlement funds anyway, given that the funds would be used to pay the costs of the liquidation. Therefore, ATO approval was not required.
The liquidators have a wide discretion as to how the liquidation is to be carried out. When a liquidator requests court approval under section 447 of the Act to enter into a long-term agreement, the court will show deference to the judgment of the liquidator.
However, court approval under this provision is not approval of the underlying transaction. The liquidator can always be held responsible if he concludes an agreement that lacks propriety. Liquidators should carefully consider whether a long-term arrangement is in the interest of a speedy and beneficial administration of the liquidation of the company.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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