TGIF – When Can Liquidators Use Partnership Assets to Satisfy Creditors’ Claims? – Insolvency / Bankruptcy / Restructuring

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Australia: TGIF – When Can Liquidators Use Partnership Assets to Satisfy Creditors’ Claims?

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This week’s TGIF examines a recent ruling that provides guidance on how and when a liquidator can sell partnership assets held by an insolvent partnership manager to satisfy creditors’ claims.

Key points to remember

  • When a general partnership manager is an agent of the partners, he has a right to compensation for debts incurred in the exercise of his function as manager and a right of enjoyment on the property of the company in collective name that it holds as a guarantee for this indemnity.
  • If the manager of the general partnership becomes insolvent, this right of indemnification is a right which will pass to a liquidator.
  • The principles that apply to a liquidator dealing with the property of insolvent trust companies apply by analogy to managers of insolvent partnerships. A liquidator can apply for an instruction to sell partnership property held by the manager over which the manager has a possessory lien.

What happened?

In recent years, Petromech Pty Ltd (Petromechanical) was the manager of a partnership between Gawn Enterprises Pty Ltd and Robert Linton Gawn (Gawn Partnership). In February 2021, Petromech was liquidated.

Petromech’s liquidator then requested instructions allowing him to manage the assets of the partnership held by Petromech, settle the debts that Petromech had incurred as manager of the company Gawn and pay the remuneration and expenses of the liquidator. .

Why was Petromech an agent with a right of indemnity from Gawn Partnership?

Justice O’Bryan first found that Petromech had operated, acquired assets and incurred debt, in its capacity as manager of the Gawn Company.

His Honor then turned to the rights and interests of Petromech in this role. In doing so, O’Bryan J followed Re Victoria Station Corp Pty Ltd (qualified directors) (2018) 56 VR 26 (Victoria station), in which Robson J. found that the manager of a partnership had run the partnership business as an agent and not a trustee.

Justice O’Bryan considered Petromech to be an agent as well because:

  • the Gawn partnership was created by the dissolution of a previous partnership by an agreement to which Petromech and the Gawn partners were parties;
  • through this dissolution agreement (which provided that Petromech had acted as manager of the previous partnership), the Gawn partnership and Petromech agreed to the attribution of authority to Petromech as agent; and
  • the financial and tax records of the Gawn Company (which showed that Petromech traded on behalf of the Gawn Company) and the fact that Petromech held the assets of the Gawn Company in its own name supported this conclusion.

Judge O’Bryan therefore considered that Petromech had a right of indemnification against the partners of Gawn Partnership with regard to the liabilities incurred in the exercise of its role as manager. Petromech had a possessory lien on the assets of the Gawn partnership held by Petromech as security for this right of indemnification.

His Honor ruled that this right of compensation had passed to the liquidator in the event of Petromech’s insolvency.

How might the liquidator manage the assets of Gawn Partnership?

O’Bryan J. emphasized the established principles according to which:

  • a liquidator of an insolvent (former) corporate trustee cannot sell the trust property without a court order or by appointing a receiver; yet,
  • Upon appropriate request, courts are generally prepared to issue orders authorizing the liquidator of a (former) corporate trustee to sell the assets of the trust.

His Honor has ruled that similar principles apply to a (former) manager of an insolvent business of a partnership with respect to the assets of the partnership held by the manager and over which the manager has a lien. possessory. In such a case, a court may also make orders authorizing a liquidator to sell those assets of the partnership.

Accordingly, O’Bryan J issued orders directing the liquidator to be justified in selling these partnership assets for distribution to Petromech’s creditors and to pay the liquidator’s remuneration and the costs of the claim.

Comment

This decision gives an indication of when an agency relationship will have existed between a manager of a partnership and the partners as well as the implications of such a relationship for the liquidators.

Above all :

  • the assets of the partnership held by the managers of insolvent partnerships may be the subject of a possessory lien as a guarantee of their right to compensation for the liabilities incurred in the course of their duties as managers; and
  • the liquidators of company directors can benefit from instructions allowing them to sell these assets to satisfy the debts of the company director towards his creditors and to finance the remuneration of the liquidator and the costs of making such a request.

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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