The winding up or liquidation of a company is the final stage in the life of a company. This may occur in a successful company when directors no longer desire to run the company (a ‘members’ voluntary liquidation’ or ‘MVL’), or it may occur in a business that is unable to pay its bills as they fall due and payable. The latter type of liquidation, an ‘insolvent’ liquidation may be overseen by creditors (a ‘creditors’ voluntary liquidation’ or ‘CVL’) or the court.
In liquidation, a liquidator is appointed to settle the affairs of a company, investigate any potential wrongdoing by directors, realise any assets and distribute the remainder to creditors.
In the ‘Ultimate Guide to Liquidation Part 1: What is Liquidation’, we looked in detail at the liquidation process, including the main types of liquidation and the key alternatives to liquidation (including voluntary administration and the new debt restructuring process for small businesses).
In the ‘Ultimate Guide to Liquidation Part 2: Preparing for Liquidation’ we described the abysmal returns of liquidation in Australia for creditors, the steps company directors should take ahead of a possible liquidation, and the correct method for selecting a liquidator.
In this final part, the ‘Ultimate Guide to Liquidation Part 3: Responding to Liquidation’, we look at:
- How to minimise the fallout from a liquidation;
- How liquidators charge fees;
- How to review the conduct of a liquidator;
- How to replace a liquidator; and
- How to appoint a reviewing liquidator.
How to minimise the fallout of a liquidation of your company
If you build in an earthquake-prone area, you need to shore up the foundations with soil compaction, gravel or concrete. But sometimes, no matter what you do, liquefaction will occur. The same principle applies to company liquidations. Sometimes, no matter what a director has done to try and avoid a liquidation, it will loom on the horizon as the only option when a business is no longer viable. There is nothing left to do but to get out of the building before it sinks into an oozing puddle. But in that situation, directors still need to know: what things should they take on the way out or avoid doing?
In this section we look at:
- The core consequences of liquidation;
- Steps a director can take to either avoid liquidation or lessen its impact;
- Illegal phoenix activity and why it’s a bad idea;
- Positive steps to take when liquidation is inevitable.
What are some of the consequences of liquidation?
The effect of liquidation on the company is clear. Once it is wound up, and the assets liquidated, all that remains is a ‘shell’ that will be de-registered by the Australian Securities & Investments Commission (ASIC). But what are some of the consequences for directors? Liquidation has a range of negative possible consequences for directors including:
- Reputational damage. Unfortunately, there is a stigma that surrounds the term ‘liquidation’. This is not entirely justified – liquidation can happen for many different reasons and does not necessarily mean business failure. However, now that liquidations and the names of directors are published online, the news is more likely to remain accessible and continue to tarnish the name of the director;
- The calling in of director personal guarantees. In the common situation where directors have personally guaranteed debts, at the point of liquidation these are likely to be called in;
- Mortgages on director’s property. Any collateral provided to support a loan to the company is likely to be called in after liquidation (the ‘secured monies’);
- Loan accounts. It is common for directors to draw down on a ‘loan account’ instead of drawing a salary. This must be properly documented in the company’s accounts. At the point of liquidation, this becomes payable;
- Liquidator action for breach of director duties. If a director has been in breach of their duties (such as the duty to prevent insolvent trading), the liquidator could take legal action against that director – unlikely except in the worst cases;
- Director Penalty Notice (DPN). These are notices sent from the Australian Tax Office (‘ATO’) that can make the director personally liable for some types of tax debt (namely PAYG and Superannuation Guarantee Charge);
- Unreasonable director-related transactions. These are transactions between the company and a director or their associate which are unreasonable. A transaction is defined as ‘unreasonable’, where a reasonable person in the company’s circumstances would not have entered into it, having regard to the benefits and detriments to the company and the interests of the other party to the contract (see section 588FDA of the Corporations Act 2001 (Cth));
- Director banning. If a director has been involved in at least two companies that have been liquidated in the past seven years paying creditors less than 50 cents in the dollar (i.e. most CVLs), ASIC may disqualify them for up to five years;
- Loss of licences for directors. In Queensland, the director of a construction company will have their licence cancelled on the appointment of a liquidator. For an authorised energy retailer or licensee, the appointment of a liquidator is classed as a ‘retailer of last resort’ event, and can result in the revocation or their authorisation.
What steps can a director take to avoid these consequences?
Sometimes directors can rush into liquidation. Fear of allowing insolvent trading may scare directors into moving for liquidation earlier than they need to. In light of this, it is important that directors consider whether liquidation is truly necessary. This includes:
- Seeking early solvency advice to determine whether the company truly is insolvent, or is, perhaps, experiencing a temporary shortage of working capital;
- If solvent, carrying out an MVL rather than a CVL. As there are (usually) no unpaid creditors, this is more of a low-key affair than a CVL;
- Seeking advice on carrying out a ‘pre pack insolvency arrangement’ (‘pre pack’), which results in the liquidation of a company, but allows for the business to endure in another form;
- Seeking professional advice to avoid recovery against directors personally (e.g., moving assets into a discretionary trust);
- Seeking advice on whether appointing a ‘small business restructuring practitioner’ (‘restructuring practitioner’) may be appropriate. For more information on this process see our ‘Ultimate Guide to Liquidation Part 1: What is Liquidation’.
Directors should not stoop to ‘phoenix activity’
Directors must be careful that, in preparing for a possible liquidation, they do not engage in illegal phoenix activity, or allow someone else to do so on their behalf. Illegal phoenix activity (read more about this activity from ASIC) is the transfer of property out of the company before liquidation (for less than market consideration). This is defined as a ‘creditor-defeating disposition’ under the law, and creates a risk of liability for both directors and their accountants or advisors. Other related activities that are prohibited include:
- Destruction of books and records. This may be attempted in order to hinder investigations and hide property and transactions from liquidators;
- Using fake names of directors or using ‘dummy’ directors – that is, directors who act on behalf of a non-director;
- Backdating documents.
As well as the serious legal consequences, directors need to consider the following matters before attempting phoenix activity:
- Phoenix activity is unlikely to work. Austrac will disclose to liquidators all transactions above $10k, and the liquidator has full access to bank accounts. Directors can forget about trying to hide any transactions;
- The ATO’s DPN regime means that a failure to file tax returns can result in personal liability for directors;
- In addition to the liquidators and the ATO, creditors will not hesitate to dob in any conduct they have seen that is improper;
- Even if liquidators have limited funds to pursue directors, the ATO, ASIC and the Fair Entitlements Guarantee (‘FEG’) Scheme will also fund actions to recover assets, or discourage non-compliance and fraud.
Overall, it is clear that attempting phoenix activity will, at the least, be a major source of stress to directors and more than likely won’t be worth it in the end. A much better approach is to get on with saving the business, rather than fighting running battles with creditors and liquidators that may take years.
It is worth noting, however, that directors should still seek professional advice to protect their interests. There are many changes that could be made to protect director interests that are perfectly within the law.
What to do when liquidation can’t be avoided
So, if phoenix activity is out of the question, what next? If companies are insolvent, directors need to move quickly to:
- Carry out a bookkeeping writeup. This means directors will understand exactly where they stand, and what the returns are likely to be on liquidation. That way, they can plan their next steps;
- Consider voluntary administration. In this process, an independent professional is appointed to take control of the business and attempt to work out a compromise with creditors, known as a ‘Deed of Company Agreement’ (or ‘DOCA’). While the success rates of voluntary administration are poor, it does give directors one thing – it delays any possible liquidation, which can be essential for directors to get their affairs in order;
- Consider a formal debt restructuring. This new process, available only to small businesses, means that a specially qualified practitioner is appointed to the business to attempt to restructure and come to an agreed payment plan with creditors;
- Negotiate with creditors. Directors may be able to come to an arrangement with creditors so that they do not pursue a personal guarantee or a mortgage they have over director property;
- Seek legal advice. Directors may need to engage experienced counsel to negotiate with the liquidator after appointment. This way, directors may be able to pursue a sensible settlement, rather than litigation. Remember that liquidation moves slowly, so it may result in 1-3 years of investigation and negotiation.
Key take-aways for minimising the impact of liquidation
- The negative consequences of liquidation for directors are significant, so this step should not be taken lightly;
- Directors of companies in difficulty need to seek professional advice early to avoid liquidation, especially a compulsory liquidation;
- Illegal phoenix activity is dangerous for directors and their advisors, and may not work anyway;
- When liquidation cannot be avoided, professional advice should be sought to protect directors from liability as much as possible.
How do liquidators set fees?
Once the decision has been made to appoint a liquidator, how is it determined how much they will be paid? Some key matters to be aware of with respect to liquidator fee-setting include:
- Excessive charging by liquidators puts the claims of unsecured creditors at risk;
- Remuneration must be ‘reasonable’ and take into account a range of factors (we set these out further below);
- While excessive charging can be challenged by creditors, the best option is for creditors to take care in appointing responsible liquidators and thoroughly examine the proposed costs of a liquidator before approving them;
- Liquidations in Australia usually occur when a business is in financial difficulty. This means that creditors have every reason to fear that they will be left out of pocket. In light of this, creditors have a real interest in ensuring that there is not excessive charging for the liquidator’s services. The main criticism of hourly billing is that it helps the unethical and incompetent and provides a disincentive to the industrious and entrepreneurial.
As an example of perceived overcharging, consider the recent case of Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2). In that case the Federal Court objected to the charging rates as unreasonable (for example, $700 per hour for partners), when they were clearly out of step with market rates.
In this section of the guide we answer the following questions:
- What are liquidators entitled to and what is their priority compared to other stakeholders?
- Who approves the remuneration/reimbursement?
- How are fees calculated? What is reasonable?
- How can fees be challenged?
What are liquidators entitled to and what is their priority compared to other stakeholders?
Under the Corporations Act 2001 (Cth) and the Insolvency Practice Schedule (Corporations) 2016, liquidators are entitled to:
- Reasonable fees/remuneration; and
- Reimbursement for out-of-pocket costs incurred in their role as liquidator.
The specific remuneration and reimbursement will be determined by the ‘decision-maker’s’ overall judgement as to what is ‘reasonable’.
So, who is the decision-maker? The identity of the decision-maker who determines the remuneration/reimbursement depends partially on the type of liquidation. In the case of a CVL, remuneration must be approved by the creditors themselves, a ‘committee of inspection’, or the court (note, in the new ‘simplified liquidation’ process for small businesses there are no committees of inspection). In the case of an MVL, approval must be via a resolution of the company or the court. You can read more about the CVL and MVL processes in the ‘Ultimate Guide to Liquidation Part 1: What is Liquidation’.
The initial step in the remuneration process is for the liquidator to send an ‘Initial remuneration notice’ within ten business days of the resolution to wind up the company, or 20 business days for a court liquidation.
Key matters set out in this notice include the method of payment, the rate of fees, an estimate of the expected total amount and an explanation as to why a particular method of calculation was chosen.
When seeking approval of the proposed fees the liquidator must send a ‘Report on proposed fees’ setting out further information, including the likely impact the fees will have on any dividends to creditors. This process ensures that the decision-maker has the necessary information to determine whether the proposed remuneration is reasonable. Where the fees have not been approved, the liquidator can make a claim for reasonable fees less than or equal to $5,272 excluding GST.
The priority of payment for unsecured creditors in the winding up of a company is set out in section 556 of the Corporations Act 2001 (Cth). The liquidator’s duly incurred costs have priority over most other unsecured claims including employee wages, worker’s compensation and superannuation. The policy is that liquidators should be paid first or else there won’t be anyone to sort out the company’s affairs and conduct investigations.
Who approves the remuneration/reimbursement?
Where the approval of creditors is sought, this may be attained by a resolution at a meeting of the creditors or by giving written notice. Where written notice is given, it must include the reasons for the fees proposed and the likely impact on creditors. Creditors must be invited to either vote yes or no, object to the resolution without a meeting, and be given a reasonable amount of time in order to receive a reply. Note, in a ‘simplified liquidation’ process there is no requirement for the liquidator to convene a meeting and remuneration can be dealt with electronically.
Where a ‘committee of inspection’ has been appointed, they may approve the fees as representatives of all creditors and employees. You can read more about what a committee of inspection is and how it can be appointed further below.
If fees are not settled by either resolution of creditors or the committee of inspection, then they must be set by the Federal or Supreme Court.
How are the fees calculated? What is ‘reasonable’?
There is no set method for calculating fees. Most commonly, they are set based on the billed hours of the liquidator. If this is done, there must be a cap set for the amount that can be billed. If this is exceeded, the extra fees need to be reconsidered by the decision-maker.
In considering payment on an hour spent basis it is important for creditors to remember that this represents the entire cost to the business and not the going rate of a single professional or group of professionals. Creditors should consider the rates of competitors when making their decision.
What counts as reasonable is ‘holistic’ for the decision-makers taking into account a range of factors. These factors are set out in 60-12 of the Insolvency Practice Schedule (Corporations) 2016 and include:
- the extent to which the work was reasonably necessary;
- the period of the work;
- the quality of the work;
- the complexity of the work;
- and the value and nature of the property dealt with.
One implication of these factors, the Court has found, is that it is inappropriate for a liquidator to calculate its fees on an ‘ad valorem’ basis, which would include charging based on a set percentage for all liquidations or some sub-class of liquidations. The liquidator needs to consider what is reasonable for the particular liquidation in question and crucially, the work actually done on that liquidation (Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liquidation) v Sakr  NSWCA 38).
How can fees be challenged?
If a creditor does not consider that a fee is reasonable, then it is their right to vote against approving those fees. If the fees are approved by a resolution of creditors or a committee of inspection, a creditor can still generally apply to the court to review those fees.
In addition, creditors have the option of appointing a ‘reviewing liquidator’ who is a registered liquidator appointed to review the fees charged. This requires a resolution of the creditors. This review can only look at:
- remuneration approved in the prior six months; and
- costs or expenses incurred during the previous 12-month period.
Note, in a ‘simplified liquidation’ there are no committees of inspection, nor can reviewing liquidators be appointed by creditors. However, in that process the court still retains its oversight role and is entitled to appoint a reviewing liquidator or make orders relating to fees.
Summary of liquidator fee-charging
To avoid getting soaked by liquidators, it is important for the creditors and any other appointing party to consider that liquidator’s history and reputation with respect to charging before appointing them. If a liquidator with a poor reputation is appointed, creditors may want to consider replacing them (we discuss the replacement process in further detail below). Otherwise, it is important that creditors and other decision-makers do their due diligence before approving remuneration to ensure that it is reasonable.
How to review the conduct of a liquidator
We have written previously about the relevant considerations when appointing a liquidator, but what happens where questions arise about the conduct of a liquidator once they are in the job? What if, for example, a creditor suspects a liquidator of being ‘in cahoots’ with the directors of the company to facilitate illegal phoenix activity?
In this section, we look at the options available to interested parties, including directors, creditors and regulators to review the conduct of liquidators and, in some cases, have them replaced. We explain:
- the role of the liquidator;
- liquidator independence;
- removal of liquidators via resolution of creditors;
- court applications;
- appointment of a ‘reviewing liquidator’;
- committees of inspection.
The role of the liquidator
In overseeing the liquidation process, the liquidator must:
- ascertain the assets of the company and protect those assets;
- investigate and report to creditors about the company’s affairs;
- investigate the failure of the company, considering the committing of any offences and then reporting the result of any such investigation to ASIC;
- distribute the proceeds of the winding-up according to creditor prioritisation rules, accounting for the costs of the liquidation.
On appointment, the liquidator must give creditors notice of their appointment and advise them of a range of matters, including:
- the right to request information;
- the right to give directions;
- the right to appoint a reviewing liquidator;
- the right to remove and replace the liquidator.
Depending on the type of liquidation, this notification must be given within 10 or 20 business days.
In this section, we are focused on how creditors may use their powers to review or direct the behaviour of liquidators.
Sections 532 (1) and (2) of the Corporations Act 2001 (Cth) set out the requirements that an appointed liquidator of a company must be a registered liquidator and not be in a set of restricted relationships with the company or its directors. The latter condition in the Corporations Act 2001 (Cth), as well as a long line of judicial decisions, confirms the need for liquidators to be ‘independent’ of the company. The independence of the liquidator is also preserved by the requirement of a liquidator to make a declaration as to relevant relationships and indemnities prior to appointment.
Note, however, that under section 532(4) of the Corporations Act 2001 (Cth), in the case of an MVL, if a company is a proprietary company the appointed voluntary liquidator is not required to be a registered liquidator and can be an officer of the company or another professional with the necessary expertise.
Independence can be seen as a component of the obligation of a liquidator always to act in the interests of creditors, not directors. Independence ensures that liquidators are in a position to impartially investigate directors and pursue legal action against them where necessary.
A common reason that creditors or other interested parties might have to review the conduct of a liquidator is a conflict of interest/perceived conflict of interest or lack of independence. In light of this we consider below two important considerations in evaluating liquidator independence:
- The test of independence;
- The duty to investigate.
The test for independence is an objective one. It is not enough that a liquidator has actually acted independently – a hypothetical fair-minded observer would also need to perceive the behaviour as independent (Australian Securities and Investment Commission v Franklin (liquidator), in the matter of Walton Construction Pty Ltd (in liq)  FCA 68). The recent case of Hooke v Bux Global Limited (No. 6)  FCA 1545 emphasised the importance of liquidators being seen to be independent. In this case, an administrator had his appointment as the liquidator of the company rejected by the court. The court emphasised that there was no one factor which disqualified the administrator from being appointed, rather it “must be viewed in the context of the particular circumstances in which this company is being ordered to be wound up.”
In the circumstances of that case, the fact that there were serious questions about whether fraud had occurred in the final days of the company and the fact that the company had only been trading with the support of a related company which had itself provided funding to the administrator, meant that the administrator did not satisfy this test. It was not a proven lack of independence but a perception of independence that was lacking.
In a practical sense, how should this duty of independence impact the way the liquidator carries out their role? In one newsletter, ASIC emphasised its compliance focus on registered liquidators who have not been asking sufficient questions of the company and its officers when carrying out their duties. In particular, ASIC expressed concern at liquidators not asking sufficient questions about changes to company officers shortly before liquidator appointment.
ASIC emphasised that there is a question as to the ability of directors to form judgements as to company solvency when they have just been appointed (recall that this determination is a requirement for many liquidations). ASIC observed that this lack of investigation into officer behaviour could be seen as lessening creditor confidence in liquidator independence.
Creditors’ resolution to remove and replace a liquidator
In many cases, it will be the creditors, rather than any other party, who are dissatisfied with the conduct of the liquidator. After all, the liquidators are obligated to the creditors, not to the directors of the company or the company itself. Creditors have the right, at any time, to propose the removal and replacement of the liquidator. We discuss this process in detail below in the section ‘How to replace a liquidator’.
Power to apply to the court for replacement of the liquidator or declarations about liquidator’s conduct
There are times when a creditor resolution to replace a liquidator will not be effective. For example, where it is impossible to get other creditors to agree to that resolution, where a non-creditor wants to replace the liquidator (such as ASIC), or where replacement is not sought.
Under section 447A of the Corporations Act 2001 (Cth), the court has broad powers to make orders as it sees fit in relation to liquidation. See here for a discussion of the application of this power in the case of voluntary administration.
If creditors are concerned about fees or costs incurred or to be incurred by the liquidator, there is another mechanism available. A ‘reviewing liquidator’ can be appointed to review fees and/or costs incurred (Insolvency Practice Rules (Corporations) 2016). Note, this option is not available in a ‘simplified liquidation’.
The liquidator and their staff are required to cooperate with the reviewing liquidator and the reviewing liquidator may look into:
- approved remuneration over the previous six months;
- costs or expenses incurred during the previous 12 months.
We discuss this process in more detail below under the heading ‘How is a reviewing liquidator appointed?’
Committee of inspection
If creditors wish to ensure that they have influence over the liquidators before any problems arise, one useful option could be to form a ‘committee of inspection’ (Insolvency Practice Rules (Corporations) 2016). This committee:
- monitors the conduct of the liquidator;
- may give directions to the liquidator (though note, the liquidator need only ‘have regard’ to such directions: they are not bound to follow them).
A committee of inspection may be formed by resolution at a meeting called for that purpose and creditors themselves will choose the members.
As mentioned earlier, a committee of inspection cannot be appointed as part of the new ‘simplified liquidation’ process.
Summary: Reviewing the conduct of a liquidator
There are a range of options available for reviewing the conduct of a liquidator, or in some cases, replacing that liquidator. Note, however, that these are primarily options for creditors who are concerned with the behaviour of liquidators, particularly those who are not acting independently or seen to be doing so. Of particular note are the powerful options of a ‘committee of inspection’ or appointment of a ‘reviewing liquidator’ that do not require resorting to expensive court action.
For directors of companies, however, options are very limited for replacing or reviewing the conduct of a liquidator. In light of this, it is all the more important that directors seek specialist advice about liquidation well before insolvency is imminent.
How do you replace a liquidator?
Once appointed, there are two key methods for replacing liquidators: creditor resolution or court replacement. We explain these methods in detail below. It is worth noting that neither of these options is particularly useful for dissatisfied directors. The focus for directors should always be on the initial appointment of a liquidator and seeking professional advice before doing so.
When can the liquidation process be stopped?
The liquidation process itself can be stopped via an application to the court for the process to be stayed or terminated. This is a step sometimes taken by directors where the creditors are satisfied with their payments to date (i.e., all debts are considered paid) and the company is no longer considered insolvent. A determination will be made entirely at the discretion of the court. This is likely to be an expensive process given all the creditors need to be paid in full as well as the liquidator’s fees. There is also a requirement that a court is satisfied that the newly restored company directors have appropriate “commercial morality”. Termination applications are usually only started by directors who mistakenly allow a company to be wound up by failing to respond to a winding-up process (i.e. in a situation where the ASIC registered address is not updated).
The director’s role in the appointment of a liquidator
One might ask if it is shareholders, creditors or the court that initiate the liquidation, what say do directors have in the appointment of a liquidator?
Directors (at law) have an indirect say in the appointment of liquidators through the following mechanisms:
- In the case of an MVL, the directors may initiate the meeting where shareholders vote on a liquidation;
- In the case of a CVL, the directors may initiate a Voluntary Administration, and appoint a voluntary administrator, who subsequently becomes the liquidator;
- If a liquidation is otherwise required, the directors may apply for a court liquidation.
The reality, however, is that the directors usually select the liquidator because in most small-to-medium sized enterprises the directors and shareholders are the same persons.
The choice of liquidator can have a substantial impact on directors. This includes:
- the power of a liquidator to investigate directors and report impropriety to the authorities;
- the ability of liquidators to engage with the media about the behaviour of directors.
In all cases, it is at this crucial appointment stage where the directors can have a say on the appropriateness of a given liquidator. Once appointed the liquidator is legally obligated to act only in the interests of creditors and shareholders. They do not act in the interest of, or at the behest of, directors. Directors often complain that insolvency practitioners are like a ‘Mr Jekyll and Mr Hyde’: friendly and gregarious upfront to obtain the appointment and then aggressive once appointed. This situation is not the fault of the insolvency practitioner, who is both running a business and fulfilling legal duties, but the fault of policy makers who have unrealistic expectations of privately appointed liquidators.
For more about the considerations that should go into selecting a liquidator see the Ultimate Guide to Liquidation Part Two: Preparing for Liquidation.
Liquidator replacement via creditor resolution
Replacement of a liquidator might be sought where it is perceived that a liquidator is acting improperly or breaching their duty of independence.
In many cases, it will be the creditors who are dissatisfied with the conduct of the liquidator. After all, the liquidators are obligated to the creditors, not to the directors of the company or the company itself. Creditors have the right, at any time, to propose the removal and replacement of the liquidator.
If a creditor wishes to replace a liquidator via this mechanism, they should first approach a registered liquidator and seek their written consent for appointment. The creditor seeking a replacement liquidator must request the existing liquidator call a meeting. Note, however, that this is not a guaranteed method for replacing the liquidator. The existing liquidator is not required to comply with any request that is ‘not reasonable’.
Liquidator replacement via court determination
Liquidator replacement via creditor resolution will not be available in many cases. It may be that creditors cannot agree on a replacement liquidator, or that a non-creditor, such as a director, seeks the replacement of a liquidator. Or, in the case of a simplified liquidation, it may be that applying to the court may be the only option for replacing a liquidator.
In that case, an individual’s only recourse is to apply to the court under section 447A of the Corporations Act 2001 (Cth). This section provides the court with broad powers to make orders as it sees fit in relation to liquidation.
This application to the court allows creditors, others with a financial interest and directors to apply to the court for an order:
- For a determination in relation to any matter related to the liquidation;
- That an individual be replaced as the liquidator;
- For remuneration.
It should be emphasised that directors will not be able to use this option if they merely disapprove of the liquidator’s actions. They will need to demonstrate that the liquidator is failing to perform their legal duties.
Key take-aways for liquidator replacement
- The best opportunity for a director to have a say on who would be an appropriate liquidator, is before the initial appointment;
- The director can exert their influence on the appointment of a liquidator in a variety of ways. This may occur through calling a meeting of shareholders (in an MVL), through appointing the Voluntary Administrator (in a CVL) or via applying directly to the Court;
- Once appointed, the director will have little ability to replace the liquidator. The only option available will require application to the court, a clear breach of duties, and will be very costly.
What is the process for appointing a reviewing liquidator?
Up until 2017, the key practical method of reviewing liquidator remuneration and expenses was to apply to the court. However, like any court process, this was an expensive and time-consuming option. In this section we take a deeper look at the option of appointing a reviewing liquidator. While it appears to be an under-utilised tool, the costs of appointing a reviewing liquidator means that creditors should also consider other options that they have available to them.
Note that a reviewing liquidator cannot be appointed when a company is undergoing the new ‘simplified liquidation’ process.
Liquidators don’t come cheap. In many cases, after paying liquidator remuneration and expenses, nothing is left for the general pool of unsecured creditors. This means that, when faced with a possible winding up, creditors have a significant interest in ensuring that there are not excessive charges for the liquidator’s services.
In the recent case of Lock, in the matter of Cedenco JV Australia Pty Ltd (in liq) (No 2), the Federal Court objected to the charging rates as unreasonable (for example, $700 per hour for partners), when they were clearly out of step with market rates.
Is there any justification for such high rates? In the past, some liquidators have argued that the high fees constitute a cross-subsidy for those liquidations where nothing remains to pay liquidator remuneration and expenses.
There must be approval from either the creditors, the committee of inspection, or the court for liquidator remuneration and expenses. Nevertheless, creditors may be concerned about remuneration and costs, after approval. Or, an individual creditor may have concerns with the amount finally charged. There is also the consideration that, because of the massive power imbalance between creditors and liquidators as a group, creditors have no option but to take the prices set by the liquidator, even if they are over-inflated. For these reasons, the appointment of a reviewing liquidator should be considered.
How is a reviewing liquidator appointed?
A reviewing liquidator can be appointed (with the consent of that reviewing liquidator) in three different ways:
- By the creditors themselves through resolution. Where appointed by resolution, that resolution must specify the particular remuneration or expenses to be reviewed and how the cost of the review itself is to be determined;
- By ASIC. Given resource constraints, it appears that ASIC is limiting its appointment of reviewing liquidators to suspected phoenix activity cases.
- By the court;
- By an individual creditor, with the agreement of the existing liquidator.
How will the reviewing liquidator carry out their review?
In considering appropriate remuneration, the review may (but need not) include an assessment of whether the remuneration is ‘reasonable’. In considering whether the expenses are appropriate, the review must include an assessment of whether the cost or expense was properly incurred by the external administrator.
The liquidator and their staff are required to cooperate with the reviewing liquidator and the reviewing liquidator may look into:
- approved remuneration over the previous six months;
- costs or expenses incurred during the previous 12 months.
The reviewing liquidator has a range of powers to permit them to carry out their job effectively including engaging experts to assist or directing the liquidator or company to produce certain information. The reviewing liquidator publishes the results of their review in a final report to creditors.
The court has an oversight function with respect to the reviewing liquidator. The reviewing liquidator can apply to the court for orders directing the liquidator to act. In addition, anyone with a financial interest (such as creditors) can apply to the court directing the reviewing liquidator to carry out the review in a certain way or to remove the reviewing liquidator.
What other options should be considered?
Thus far, appointing a reviewing liquidator is a tool that has not been heavily used by creditors. One reason for this may be that the costs of the reviewing liquidator are borne by the creditors, just like the costs of the existing liquidator. In light of this, when considering whether to appoint a reviewing liquidator, the creditors need to consider the effect this could have on their own returns. In light of this, other options should also be considered, such as:
- the right to request information from liquidators that can shed light on the costs they are incurring;
- exercising the right to replace an existing liquidator with a new one;
- appointing a committee of inspection that can carry out an ongoing review of the liquidator’s activities.
Once a liquidation is under way, both directors and creditors may be unsatisfied with the performance of the liquidator and need to consider what steps can be taken to ‘rein them in’. As the actions that can be taken against a liquidator are strictly limited by law, the most important actions that can be taken by directors are at the preparatory stage: checking their own legal and accounting situation and making sure they choose the right liquidator. It is important when choosing the liquidator to consider the fee arrangements proposed by that liquidator and whether they are appropriate.
Once the liquidation is under way, creditors need to consider what steps they can take to respond to or oppose the actions of liquidators. Options that may be available include:
- Appointing a committee of inspection early on. This committee of creditors reviews the actions of liquidators and can direct the liquidator to act. The utility of these committees is limited by the fact that they need only ‘have regard’ to the directions of liquidators and do not necessarily have to act on them;
- Replacing the liquidator. This step can be initiated by dissatisfied creditors. Note, however, that a liquidator need not follow any resolution of creditors that is deemed to be ‘unreasonable’. There is also the possibility of applying to the court for a replacement of the liquidator;
- Appointing a ‘reviewing liquidator’. They review the liquidation for costs. This action can be taken by creditors as a whole by resolution, by ASIC, by the court, or by a creditor alone (with the consent of the current liquidator”).
It should be emphasised that in a ‘simplified liquidation’ many of these options are unavailable and the main recourse available to creditors is court oversight of the liquidation process.