By Renee Smith a Law Graduate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
In a recent decision of the Full Court of the Federal Court, Asden Developments Pty Ltd (in liq) v Dinoris [2017] FCAFC 117, the Court examined the actions of an external administrator, namely a liquidator, in relation to s180(1) of the Corporations Act 2001 (Cth) (“the Act”).
The law
Section 180 of the Act, in particular, says that a director or other officer of a corporation owes the corporation a civil obligation to exercise his/her powers and to discharge his/her duties with the degree of care and diligence which a reasonable person would exercise if that person were a director or officer of a corporation in the corporation’s circumstances, and occupied the office held by and had the same responsibilities within the corporations, the director or officer.
Under the Act, an ‘officer’ includes a range of persons who may exercise specialist functions in relation to the company even on a temporary basis, including any external administrators of the company.
The background facts
Under the control of a replacement liquidator (appointed 3 years after the company was wound up) a company instituted proceedings against the former liquidators, claiming they had breached their statutory duty under s180(1) of the Act. The company sought compensation under s1317H(1) of the Act for the damage said to have resulted from the alleged breaches.
It was claimed that the former liquidators had failed to make personal contact with the company’s sole director about certain funds that the director had withdrawn from the company’s bank accounts the day before the company was placed into liquidation. The newly appointed liquidator claimed that if the former liquidators had personally called the director and queried the withdrawal of funds, the director would have informed them where the money was and would have repaid the funds if asked to do so. Whilst this might seem unlikely, the very helpful director gave evidence to this effect! The new liquidator also called expert evidence of what a reasonably prudent director would have done.
The former liquidators on the other hand, contented that the duty under s180(1) of the Act did not, in the circumstances of this case, require them to contact the director personally. There were a number of reasons for the decision not to make the call and they relied on expert evidence that it was not unreasonable for the former liquidators not to contact the director personally.
The decision at first instance
The primary judge found that the former liquidators had not displayed the care and diligence of a reasonable competent liquidator when he made the decision not to attempt to make direct personal contact with the director regarding the withdrawal of funds. The primary judge also found that the former liquidators conduct was “sufficiently deficient” to constitute a breach of duty rather than a mistake or error of judgment.
However the trial judge did not award any compensation because the helpful evidence of the director – that she would have disclosed the whereabouts of the funds and returned them to the liquidators had she merely been asked …. was rejected by the judge. The judge therefore dismissed the application and ordered the company to pay the former liquidators’ costs.
The appeal to the Full Court
The company appealed the finding that no damage had been proven. The former liquidators appealed the finding of a breach of duty. The Full Court agreed with the primary judge’s statement of principle and confirmed that for as long as the liquidator remains involved in the company in that capacity, he or she owes the same overarching duties of care and diligence toward the company as the directors and other officers. The Full Court noted that having regard to the former liquidator’s duty to collect the assets of the company, “the failure to pursue an obvious line of inquiry went beyond a mere error of judgment and, as the primary judge held, was sufficiently deficient to constitute a breach of s180(1) of the Act.”
However, significantly, the Full Court also agreed with trial judge that the new liquidators were not able to establish that the failure to recover the money transferred by the director was caused by the former liquidator’s course of conduct. Therefore the Full Court did not issue any form of compensation under s1317H of the Act.
Given the appeal and cross-appeal had both been dismissed, no orders were made for the costs of the appeal.
Lessons learnt
It seems harsh to say that a liquidator can be found to be in breach of s180(1) by simply not making a phone call. In the end, the liquidator was not liable to pay a cent, and was entitled to recover his costs (albeit from a company in liquidation, subject to funds in the liquidation, or the possible personal liability of the new liquidator in certain circumstances).
However whatever the outcome, the significant amount of legal costs incurred, and not recoverable, together with the professional time and disruption to the practices of both the new liquidator and the former liquidators, make this an extremely expensive phone call, not to have made.
This case is also a useful reminder that once appointed, a liquidator is an officer of the company, and under the statutory duties to act accordingly. .
Read the judgment here.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au.
