New Creditor Powers to Request Information from Liquidators

Summary

  • Creditors are usually frustrated with the liquidation process for a range of reasons, including inadequate disclosures by liquidators of key information
  • Prior to 2016, creditors were limited in their ability to hold liquidators to account via reporting and information gathering
  • A new insolvency framework introduced in 2016 ensures that creditors have a right to request reports, documents and information from liquidators (whether individually or as a group)
  • This is an improvement on the pre-2016 framework which left creditors largely in the dark about key liquidation issues
  • While creditors need to be aware of the liquidator’s ability to refuse ‘unreasonable’ requests for information, that ability to refuse is significantly limited by the Insolvency Practice Rules (Corporations) 2016.

Estimated reading time: 6 Minutes.

The problem: lack of disclosure

When a company is wound up, creditors do not (usually) appoint the liquidator, even though the liquidator is required to act in the interests of the creditors. In light of this, creditors often end up unsatisfied with the liquidation process. Their frustrations include:

  • an overwhelming feeling of impotence in the liquidation process. Creditors may find their inquiries with liquidators stonewalled and suspect that the liquidators really work for the directors. This is usually untrue. However, liquidators are incentivised to maximise fees and carry out a liquidation as efficiently as possible. This may mean reporting to creditors is seen as an unnecessary hindrance;
  • Creditors perceive liquidators as acting as an effective monopoly. With terms of engagement so common across liquidators, creditors don’t feel they can easily appoint a better alternative, and they know they are practically impossible to replace;
  • Slow liquidations. Once appointed, liquidators have been known to take their sweet time – timeframe for a liquidation is 1-2 years. Creditors sometimes cannot afford to wait this long to find out if they will get any money back.

In this article we are focused on a new mechanism available to creditors to manage their frustration with creditors. However it is worth noting that there are other mechanisms available to creditors for supervising liquidator conduct, including:

  • removal of liquidators via a resolution of creditors;
  • court applications for replacement of a liquidator;
  • appointment of a ‘Reviewing Liquidator’;
  • appointment of a committee of inspection.

You can read more about these other processes in our article: How to Review the Conduct of a Liquidator.

The 2016 Rules

Creditors may now request their liquidator for information, reports or documents under Division 70-40 (when acting collectively by resolution) or 70-45 (when acting individually) of the Insolvency Practice Schedule (Corporations). This right applies to creditors in a creditor’s voluntary winding up and ‘members’ in the case of a members voluntary winding up.

While our focus in this article is on the power of creditors to acquire information from liquidators, these provisions also apply in the case of voluntary administration.

Under 70-40(2) and  70-45(2) of the Insolvency Practice Schedule (Corporations), a liquidator must comply with this request except where:

  • The information, report or document is not relevant to the liquidation;
  • It would breach their duties as a liquidator;
  • It would otherwise be unreasonable to do so.

The Insolvency Practice Rules (Corporations) 2016 set out the conditions under which a liquidator may hold that it is not reasonable to comply with the request. We will look at this power later in the article.

Pre-2016 Creditor Information Powers

Prior to the introduction of the Insolvency Practice Schedule (Corporations) and Insolvency Practice Rule (Corporations) 2016, what options were available for creditors who required information? The key mechanisms were:

  • Compulsory reporting processes. These were concerned primarily with directors reporting to liquidators and the Australian Securities and Investments Commission (e.g. in the Report as to Affairs (RATA) now replaced with the Report on Company Activities and Property (ROCAP)). While liquidators were expected to provide written reports to creditors, this often didn’t happen.
  • Right to view the liquidator’s books. Liquidators had (and still do) a right to inspect the liquidators books, which in turn must be up-to-date and accurate. This requires significant effort on behalf of the creditor and is not a general right to information.
  • Powers of the committee of inspection. Creditors can choose to appoint a ‘Committee of Inspection’ early in the liquidation process who represent the creditors and can direct the liquidators to act in various ways. Note, however, that the liquidator is not generally bound by the directions of the committee of inspection.

How is the new option useful?

The limits of committees of inspection and existing reporting processes meant that, in reality, creditors were limited in their ability to supervise the liquidation process. In addition to improving the tools available to creditors, the new right seeks to:

  • Enable creditors to ensure that liquidators are acting in their interests as required to by law;
  • Enable creditors to supervise the liquidator’s costs themselves. For more information on how liquidators may charge fees see How do liquidators charge fees?;
  • If there is a prospect of future litigation, provide an alternative to discovery in expensive court action. This was confirmed recently in In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6.

Liquidator’s right to refuse

The creditor’s right is only a right of request. As set out above, there are specific grounds under which the liquidator can refuse to comply under the Insolvency Practice Rules (Corporations) 2016. The most significant of those grounds for refusal is set out in 70-10 of the Insolvency Practice Rules (Corporations) 2016. A liquidator can refuse the request if:

  • complying with the request would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the request;
  • the information is privileged;
  • disclosure could be breach of confidence;
  • insufficient available property to comply with the request;
  • the information, report or document has already been provided; or
  • the information, report or document is required to be provided under the Corporations legislation within 20 business days of the request being made; or
  • the request is vexatious.

These grounds significantly limit the liquidator’s power of refusal. In a recent case, In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6, the court overruled a liquidator’s decision to refuse to provide information on the grounds that they had already provided that information to the committee of inspection. As prior provision of the information to another party is not a specified ground for refusing to provide information, the liquidator could not refuse on those grounds.

Conclusion

The new power for creditors to request information for liquidators puts significant power back in the hands of creditors. While liquidators do have the power to refuse to provide that information, the grounds for refusal are significantly limited.

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