Special purpose liquidators: a tool in the creditor's toolbox in a voluntary winding up

A recent case[1] is a reminder to creditors in a voluntary winding up that the Court has the power to appoint an additional or special purpose liquidator (SPL) to carry out a set function in the orderly liquidation of a company where it is 'just and beneficial' to do so.

What is a special purpose liquidator?

A SPL is a liquidator who is appointed by the Court to carry out a specific function in the liquidation of a company in circumstances where it is desirable that the function is not performed by the acting liquidator.  An example is where a conflict of interest exists in respect of an acting liquidator.

The power to appoint an SPL

In a creditor’s voluntary winding up that follows on from a voluntary administration, the court has power to appoint an additional liquidator pursuant to section 511 of the Corporations Act 2001 (Cth) provided that it will be 'just and beneficial' to do so.

That section provides as follows:

(1)  The liquidator, or any contributory or creditor, may apply to the Court:

      (a)  to determine any question arising in the winding up of a company; or

     (b)  to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.
…

(3)  The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

A recent example

The largest unrelated creditor of a company applied to the Court for the appointment of a SPL to investigate transactions between the company and related entities. 

The proposed SPL was to be funded by the sole director and shareholder of the applicant creditor (the funder).  It was a term of the proposed funding deed that the funder was to receive 30% of any amounts recovered in priority to any amounts that were to be paid to the company.  Under the funding deed, the balance of the money that was recovered by the SPL was to be distributed to the unsecured creditors of the company.

The court considered the following circumstances:

• There was a concern that other persons working at the liquidator’s firm were conflicted as they had been involved in previous dealings with the company and its related parties.
• In light of the potential conflict that had been identified, the funder was not satisfied that the acting liquidators had pursued potential claims against related parties.
• The funder was only prepared to enter into the funding agreement with the creditor if an SPL was appointed.
• The SPL gave evidence that the terms of the draft funding deed were within the normal range of such deeds as may be entered into from time to time by commercial litigation funders.
• The acting liquidators could not pursue any claims on behalf of the company due to the absence of sufficient resources to fund the winding up.
• If the orders sought by the creditor were made, financial resources would be available to the SPL to pursue claims for the benefit of all creditors.
• The fees of the SPL would be funded entirely by the funder and the funder would be indemnified by the company and the SPL.
• There was a possibility that the SPL would institute proceedings against the applicant creditor seeking to recover a preference payment.

The Court noted that unless the orders for the appointment of the SPL were made, it was highly likely that the potential claims against related parties would not be investigated properly as a result of the conflict, and any avenues that may be available to obtain recoveries on behalf of the creditors of the company would therefore not be pursued. 

Accordingly, the Court was satisfied that it would be beneficial to the administration of the winding up, and in the interests of the general body of creditors, for an SPL to be appointed.  The Court noted that except for the percentage that would be paid to the funder in respect of any recovery, which was reasonable, any recoveries that resulted would be for the benefit of the creditors as a whole.

Concluding comments

The appointment of a SPL is a useful tool to bear in mind during the liquidation of a company if a particular transaction is not being investigated due to a conflict of interest affecting the liquidator.  In those circumstances, the court may well find that it is 'just and beneficial' to appoint the SPL if the appointment will provide a benefit to the creditors as a whole.  One of the benefits of this approach is that the funder of the claim to be investigated and pursued by the SPL has comfort that its funds will be applied to the particular purpose and not taken up in the general administration of the liquidation.

However, the role of the SPL will generally be limited to the investigation of a particular transaction or series of transactions and this may not adequately deal with an underperforming liquidator.  If the incumbent liquidator is failing to discharge his or her obligations to achieve an orderly liquidation and provide a benefit to creditors as a whole, it may be necessary to consider the broader options that may be available such as applying to have the liquidator removed altogether and having the court appoint a new liquidator. 

Authors: Gavin Stuart and Elias Yamine