It is important for a liquidator to ensure that all possible creditors, of a company in liquidation, do not wish to lodge a proof of debt, before they proceed to finalise the liquidation.
In the matter of J A Westaway Pty Ltd (in liquidation) [2016] NSWSC 868 the Supreme Court held that a liquidator was personally liable for the costs of a creditor’s application.
The creditor had applied for an interim order against the liquidator, to restrain the liquidator from holding the final meeting of members and creditors of the company. In an earlier judgment the Court found that on the balance of convenience the meeting should be restrained, due to the substantial proof of debt lodged by the creditor.
The liquidator admitted that he had received notice from the creditor that they had instructed a solicitor to prepare a proof of debt on their behalf. After seven weeks went by without the creditor lodging a proof of debt, the liquidator believed that the creditor had changed their mind and decided to call the final meeting of the company’s members and creditors.
After the liquidator had called the final meeting, the creditor lodged a proof of debt. The liquidator decided not to adjudicate the proof of debt because he argued that:
- there was not enough time before the scheduled final meeting;
- he was on annual leave for a part of this period; and
- he did not have sufficient funds in the liquidation to obtain legal and expert advice regarding the claim.
In determining whether to order costs against the liquidator personally, the Court referred to the decision in Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385, which noted “that a liquidator will ordinarily not incur personal liability beyond the amount of the Company’s assets available for the purpose of meeting a costs award, unless the liquidator has acted unreasonably in defending litigation.”
The Court found that the liquidators conduct was unreasonable as:
- he should have enquired into whether the creditor was still intending to lodge a proof of debt, before convening the meeting, especially as the creditors claim was quite large;
- he did not initially give notice of the final meeting to the creditor, at the time when he notified the members and other creditors;
- he too readily assumed that he would not need to determine the creditor’s proof of debt, due to his lack of funding; and
- he should have indicated that he would not oppose any Court relief relating to the holding of the final meeting, especially as he believed that he did not have the power to adjourn the meeting, as it could only be adjourned by a resolution of creditor if a quorum was in attendance at the final meeting.
Tips for Liquidators
- Ensure that you receive confirmation from the company’s creditors who have not lodged a proof of debt (especially if they are owed a large amount), that they do not intend to lodge a proof of debt in the future, before calling the final meeting of the members and creditors of the company.
- Seek legal advice from an insolvency lawyer, to ensure that you have discharged your obligations as the liquidator of the company.
- Don’t assume that you don’t need to investigate a creditor’s proof of debt just because you do not have enough funding.
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
