Sorry, it’s not you, it’s me: Court appoints special purpose liquidator in circumstances where creditor unwilling to fund existing liquidator

March, 2017

By Ariel Borland, Partner, Jennifer O’Farrell, Associate, and Molly O’Neill, Lawyer

The Supreme Court of Victoria recently considered circumstances in which it would appoint a special purpose liquidator (SPL) in its decision The State of Victoria (In the Right of the Department of Education and Training) v CTM Training Solutions Pty Ltd (In Liquidation) & Ors [2017] VSC 47.  The decision demonstrates that the Court will be prepared to appoint an SPL where further investigations over and above those undertaken by the liquidator are required and a creditor is willing to fund an SPL.  Practitioners should take note that there need not be a finding of adverse conduct.

The decision is also of interest because:

    (a) the application to appoint the SPL was commenced by the State Department of Education (DET). In this regard, it is indicative
of increased activity by State and Commonwealth departments investigating their rights to recover from insolvent
debtors and whether, in this context, insolvency practitioners are thoroughly discharging their duties of investigation and pursuing appropriate actions; and
    (b) it is yet another recent example of an insolvency appointment to a “registered training organisation” (RTO), being an education t.
institution heavily subsidised by the Government.

Facts

The plaintiff, the DET, is a creditor of both the first defendant, CTM Training Solutions Pty Ltd (in liq) (CTM) and the second defendant, Southern Education Training Pty Ltd (in liq) (SET).  CTM and SET operated as RTOs and received monetary subsidies from the DET to carry out and deliver training services.

It was not disputed that DET was a creditor of both CTM and SET due to breaches of their respective funding agreements with the DET.  The third and fourth defendants were appointed joint and several liquidators of CTM and SET (the Liquidators) in mid-2016.

CTM and SET were part of an interrelated group of companies which shared directors, officers and shareholders.  Other entities within the group were also RTOs which were in the process of being wound up by the proposed SPLs.    It appears that the DET perceived advantages and economies of scale if proposed SPLs investigated certain actions which could benefit creditors of CTM and SET, and so the DET applied for orders the proposed SPLs be appointed to investigate the affairs of SET and CTM in order to determine:

    (a) whether their directors or officers had breached their duties;
    (b) whether they had traded whilst insolvent;
    (c) whether there had been any voidable transactions;
    (d) the genuineness of the related party transactions; and
    (e) whether there were other recovery proceedings which may need to be pursued, or at least considered, in the interests of
creditors of CTM and SET.(together, the Investigations).

 
Neither CTM nor SET had sufficient funds to fund the Investigations, though the Liquidators indicated that they were willing (and had commenced) to self-fund the Investigations.  The DET was willing to fully fund the proposed SPLs to pursue the Investigations.

The Liquidators did not oppose the appointment of the SPLs but submitted that the scope of their appointment should be limited to investigating and prosecuting payments made under DET’s funding agreements, so as not to render the Liquidators’ appointment nugatory.

Sifris J stated that the essential question for the Court in exercising its discretion to appoint SPLs was whether the appointment would be just and beneficial to the general body of creditors.  In this regard, his Honour specifically mentioned the following factors in agreeing to appoint the SPLs:

1. the DET was prepared to fully fund the investigations and enter into a funding deed to fund the Investigations by the SPLs.
The DET was not prepared to fund the Liquidators;
2. his Honour was a “little concerned” about the past engagement of the Liquidators’ firm in other creditors’ voluntary liquidations
by a director of entities related to CTM and SET. His Honour noted that this was “not insignificant so far as the
appearance of impartiality is concerned”; and
3. it appeared from the Liquidators’ work in progress reports that the Liquidators had only commenced work on the
Investigations after the DET had issued the application.

 
His Honour also noted a number of decisions in which a SPL was appointed in circumstances where a creditor was willing to fund the SPL, but not the pre-existing liquidator.

Conclusion

In appointing an SPL, it is not necessary for the Court to make “adverse findings” against pre-existing liquidators presently appointed to justify the appointment of SPLs.  All that is necessary is that a creditor is willing to fund an SPL over the existing liquidator, that further investigations are required and that there are otherwise insufficient funds for the existing liquidator to discharge their investigative duties.  Given the competition for insolvency jobs in the present market, and the increased sophistication of a number of State and Commonwealth departments, it is likely that there will be an increased number of SPL applications of this type in the next few years.

Contact Mills Oakley

For further information, please contact:

 

ariel-borland-mills-oakley 

Ariel Borland | Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

 

 

Jennifer O’Farrell | Associate
T: +61 3 9605 0971
E: jofarrell@millsoakley.com.au

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