Insolvency Law Update: Ousted from Office - A Recent Case Study of Gadsden v MacKinnon (Liquidator), in the matter of Allibi Pty Ltd (in liq) [2023] FCA 647.

Insolvency: 10 August 2023

Author: Amanda Robinson and Alex Nicol - Our People

On 15 June 2023, the Federal Court of Australia handed down a decision concerning an application pursuant to ss 90-10, 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations) to replace the liquidators of Allibi Pty Ltd ACN 124 066 717 (in liq) (Company) by reason of a demand the liquidators made, which the Court held did not have a proper basis.

Liquidators often have an incredibly difficult job, faced with uncooperative directors and company records that are a little short of what one might expect. This case is a reminder to insolvency practitioners to ensure there is a proper and reasonable basis underpinning any demand made in the course of their duties, particularly given the higher standard they are held to as officers of the Court.

What is the case about?

In August 2022, the solicitors for the liquidators sent a letter of demand to the directors of the Company demanding that the directors pay the sum of $69m to the liquidators within 14 days for the benefit they received from the Business Transfer and breach of director duties (August Demand).

The next day, the liquidators sent a circular including a statutory report to creditors (which was lodged with ASIC) listing the $69m claim against the directors as an asset of the Company.

In September 2022, the solicitors for the directors responded to the demand denying liability, requesting further information from the liquidators, and requiring the claims to be adequately particularised.

In October 2022, the solicitors for the liquidators responded stating, among other things, “[w]hile the Liquidators have initially made a claim against [the directors] for the sum of $69 million, it would have been quite obvious to [the directors] that the claim would be limited to the quantum of proven debts at the time of the transfer of the Billi Business” (namely, the AEMS claim for $497,723).

The Decision

Could the demand be justified? In the words of O’Callaghan J: “It will be obvious from what I have said that I emphatically disagree (sic - that there was a proper basis for forming the views that they did).”

One of the liquidators gave evidence as to “usual practice” and “common practice in the industry, for liquidators to identify potential claims at an early stage in a liquidation, and issue letters of demand in respect of them” and that in his experience “it is not uncommon for the scope and even the nature of … claims [against directors] to alter between the time of demand and the time that proceedings (if any) are issued, due to discussions with and information and documents received from the directors or other potential defendants, and the development of investigations in the liquidation”.

However, O’Callaghan J remained critical of the August Demand assertions, namely: “[i]n the course of our clients’ investigations into the Company’s affairs, our clients have identified a number of claims that the Company may have against your clients directly in relation to … [the Business Transfer] … including (without limitation): (a) entering into an unreasonable director-related transaction; (b) entering into an uncommercial transaction; and (c) breaches of directors duties”, in circumstances where it was contended that the $69m demand was actually meant to be read as $497,723 (being the AEMS claim).

O’Callaghan J sided with the directors in that, the August Demand contained very serious allegations and claims for which no proper foundation was proffered. It was ultimately held, that liquidators should not make demands for the payment of large sums of monies founded on causes of action for which there is no proper basis and the Court made orders to remove the liquidators.

What does this mean?

It is widely understood by insolvency practitioners and lawyers alike, that a demand for payment will be valid if on reasonable grounds, there is a proper legal and factual basis to make the same.

Demands can be an effective tool and can prompt debtors to consider the position you put forward and either:

• best case scenario, pay you; or
• provide the debtor with an opportunity to present their position as to why payment hasn’t, or in their view, shouldn’t occur.
• open up negotiations and/or allow you to make an informed decision as to whether to escalate the matter.

However, while a demand is a useful tool for attempting to settle a dispute without costing the time or money associated with litigation, a demand without a proper basis accompanied by threat of legal proceedings may amount to an abuse of process.

Insolvency practitioners are well versed in the disadvantages they face upon their appointment. Such disadvantages include, not knowing as much about the affairs of the company as those once in control and reliance on the cooperation of individuals (who may be the subject of their investigations), to obtain reliable information about the affairs of the company.

While insolvency practitioners are obliged to identify all possible recovery actions, this does not mean that this gives cause to make serious but purely speculative allegations in the hope that they may drive the respondent to the negotiating table.

In the event of uncooperative officers of a company or gaps in the story following an initial examination of the books and records, insolvency practitioners should consider if some of the other information finding tools available to them (including mandatory and discretionary examinations pursuant to sections 596A and 596B of the Corporations Act 2001 (Cth)) are worthwhile pursuing.

Feel free to contact one of the lawyers in the Aitken Partners Insolvency Team to discuss today.