The Imperative to Investigate

July, 2016

By Nirupa Manoharan, Special Counsel and Jennifer O’Farrell, Associate.

In the recent decision of Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788 (“Asden”), the Federal Court determined that a joint and several liquidator breached his duties of care and diligence under section 180 of the Corporations Act 2001 (Cth) (“Act”). Mills Oakley acted for the applicant.

Although on the facts and evidence in this case the Court ultimately found that no damages arose as a result of the liquidator’s breach, the Court could have delivered a much harsher decision on a slightly different set of facts.  Asden therefore serves as a timely reminder to liquidators to act prudently and with the due care and skill that would be expected of insolvency professionals who hold their special qualifications, training and experience.  This duty importantly requires a liquidator to undertake timely investigations and make all reasonable personal enquiries to locate and collect in the insolvent company’s assets.

 Facts

On 22 December 2010, Mr Dinoris and his co-appointee, Mr Combis, were appointed as joint and several voluntary liquidators (“Liquidators”) of Asden Developments Pty Ltd (“Company”) by its sole director Melinda Nichols.

The Liquidators were subsequently replaced by Mr Clout.  Under his appointment, the Company sought to establish two breaches of section 180 of the Act on Mr Dinoris’ part, namely that he failed to:

  1. investigate funds which were transferred from the Company’s bank account one week before the Liquidators’ appointment, of which $236,500 went missing (“Missing Funds”). In particular, it was alleged that Mr Dinoris breached his duty by failing to personally question Ms Nichols about the Missing Funds in circumstances where she was the Company’s sole director and sole signatory to the account from which the funds were transferred; and
  2. properly supervise the sale, and the distribution of the proceeds of sale, of a boat owned by a Company (“Boat”).

Decision

His Honour Justice Reeves re-stated the standard expected of liquidators to avoid a breach of section 180 of the Act.  In summary, whilst liquidators are subject to the same statutory duty as directors (and officers) they are also required to meet the higher standard of care and diligence expected of persons who have a liquidator’s special qualification, training and experience and who are paid to exercise those professional skills.

Reeves J found that Mr Dinoris breached his duties to the Company in relation to the Missing Funds by failing to make a “timely, personal enquiry of Ms Nichols about her involvement in the transfer of the [Missing Funds]”.  This was so even though Mr Dinoris’ evidence was that he was not confident he would obtain any relevant information from Ms Nichols.

An interesting point of note in Reeves J’s decision was his comment that the “business judgment rule” (a statutory defence to section 180 which reflects the Court’s reluctance to interfere in commercial, “business judgment” decisions) would not have been available to Mr Dinoris.  Specifically, Reeves J stated that the case concerned Mr Dinoris’ statutory obligations to investigate and, as such, fell outside the ambit of a decision made in the conduct of the Company’s business or commercial activities.  Hence, the business judgment rule could not apply.

The Court ultimately, and rather oddly, held that the Company suffered no loss from Mr Dinoris’ breach of section 180 of the Act.  This aspect of the decision was based on Reeves J’s assessment of Ms Nichols’ and Mr Dinoris’ evidence and his ultimate conclusion that Ms Nichols would not, even if further enquiries had been made, have disclosed where the Missing Funds were and would not have paid the Missing Funds to the Liquidators.  Hence, Reeves J determined, it could not be said that any damage flowed from Mr Dinoris’ failure to make personal enquires of Ms Nichols.

In relation to the Boat, Reeves J found that Mr Dinoris had properly appointed an agent to collect the Boat and sell it.  Having properly appointed an agent, Reeves J held that Mr Dinoris was not required to supervise the agent’s conduct of the sale of the Boat or even the distribution of the sale proceeds, which Reeves J stated the appointed agent could assess.  We consider the latter aspect of this decision questionable – specifically the distribution of the proceeds of sale of a company’s property should not be readily delegable to an agent to administer but should remain an obligation which a liquidator should be closely involved with, oversee and authorise.

Take away points

The Court’s decision as to whether any damage resulted from Mr Dinoris’ breach could, on a different judge’s assessment of the evidence, have easily gone the other way.  That is, in many other situations, a failure to make proper and personal enquiries of directors and officers may result in a liquidator failing to identify and locate all of a company’s property, thereby causing the company (and its creditors) loss and damage.

Asden also suggests that – save for perhaps in a trade on scenario – liquidators cannot necessarily avail themselves of the “business judgment rule” as a defence to a breach of section 180.  It is therefore imperative that, on appointment, liquidators turn their mind to, and make all reasonable personal enquiries regarding, the whereabouts of the insolvent company’s assets, regardless of the attitude of, or response from, the persons contacted in co-operating with the liquidator’s investigations.

 

Contact Mills Oakley

Nirupa Manoharan |
Special Counsel
T: +61 3 9605 0808
E: nmanoharan@millsoakley.com.au

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