Legal Insights

Court denies directors leave to sue liquidators for breach of duty

By Sam Kingston

• 08 April 2020 • 6 min read

As ARITA has recently noted, the insolvency profession has been under significant strain in recent years and may not be equipped for a bushfire and COVID-19 lead surge in liquidations, particularly assetless liquidations. Liquidators may take some comfort that, notwithstanding the increased scrutiny and potential criticism, courts will support their appointees. In Aardwolf Industries LLC v Riad Tayeh [2020] NSWSC 299, Justice Rees found that the liquidators did not owe a duty to a third party and reinforced the position that liquidators are not engaging “in trade or commerce” when carrying out their duties.

The plaintiffs sought leave to commence proceedings against the liquidators for damages in negligence and for misleading or deceptive conduct arising from the liquidator’s sale of IP rights

In making her decision to refuse leave, Justice Rees placed particular emphasis on the following:

  • The liquidators were unfunded. At the early stages of their appointment, the liquidators faced “great difficulty extracting books and records and information from the directors”. In particular, the directors failed to comply with their statutory obligations to cooperate with the liquidators and to submit a RATA.
  • Whilst the directors eventually provided information, the information was less than fulsome and did not specifically alert the liquidators to the suggestion later made that the intellectual property rights of the companies had been abandoned and assigned to other entities;
  • One of the directors was aware that the liquidators were taking steps to assign certain trademarks but he failed to say that the trademarks were no longer property of the companies with the liquidators; and
  • No complaint was made to the liquidators until 2016 and it was another three years until these proceedings were commenced, moments before the expiry of the limitation period.

Leave to sue a court-appointed liquidator

Leave is required to sue a Court appointed liquidator. The courts have been reluctant to set down a hard and fast rule as to when leave will be granted. However, the following principles are important to the Court’s decision as to when it will grant leave:

  1. the Court will protect its officers from spurious or vexatious litigation;[1] and
  2. the Court will protect the integrity of the winding up process to ensure no wrongful interference with that process.[2]

Relevantly, a prospective litigant must demonstrate its claim has sufficient merit.[3] A claim will likely lack the relevant merit where it is brought after the conclusion of the liquidation. This is because, if leave were to be given following completion of the liquidation and for a spurious claim no less, liquidators would never feel secure in carrying out their duties due to the fear that some belated action could be brought against them.[4]

In this case, Justice Rees said that she was “not prepared to allow a Court appointed liquidator to be subject to such an action in respect of matters which happened so long ago and in respect of which the plaintiffs have not agitated their complaints in a timely manner.” Therefore, Justice Rees refused leave to permit the plaintiffs to sue the liquidators for how they did their job in the absence of such cooperation.

No duty to third parties

Justice Rees then considered whether the liquidators could be said to owe a duty of care to third parties in the position of the plaintiffs. Relevant to this question was whether a party is liable for economic loss it has caused. Claims for pure economic loss in Australia is a developing area of law. One line of authority recognises that the vulnerability of the party alleged to have suffered pure economic loss is an important requirement.[5] Such vulnerability will be evident where the parties are unable to protect themselves from the consequences of a want of reasonable care on the part of the liquidators. Another line of authority casts doubt on this position, at least where the liquidator’s fiduciary duty to the company does not coincide with the asserted duty of care.[6]

In this case, the plaintiffs alleged that the liquidators did not exercise due care and skill in ascertaining what the assets of the companies were and therefore sold assets they were not entitled to sell. Justice Rees failed to find any vulnerability on the part of the plaintiffs as the directors had failed to assist the liquidators in gathering information about the affairs of the companies and in particular, the assets of the companies.

Therefore, the Court could not find any real prospect that the plaintiffs will establish the posited duty as they lacked the vulnerability which they contend formed the basis of that duty. It was entirely within the power of the directors to protect their companies by simply telling the liquidators what only they knew about the companies IP assets.

Proposed misleading and deceptive conduct claim

Similarly, the Court rejected the plaintiffs allegations that entering into a Trademark Deed of Assignment constituted representations made by the liquidators in trade or commerce to the purchaser of the IP rights.

This is because Justice Rees found that the liquidators’ actions fell within a Court appointed liquidator’s function of identifying assets of the company and realising those assets as best can be done in the circumstances. Any suggestion that the liquidators were acting “in trade or commerce” for the purpose of section 18 of the Australian Consumer Law, was weak.

Key takeaways

This case demonstrates that the Court will support its appointees where spurious and untimely claims are made against them. Furthermore, this decision highlights that a duty to third parties will not exist where it cannot be shown that the relevant party suffers from a vulnerability. Notwithstanding the facts in this case, in the right circumstance a party may theoretically prove that the requisite vulnerability to give rise to a liquidator’s duty of care to third parties. Finally, this case provides support for the proposition that in carrying out their duties, a liquidator will not be considered to be acting “in trade or commerce”.

[1] Re Siromath Pty Ltd (No. 3) (1991) 25 NSWLR 25 at 29; Re Magic Aust. Pty Ltd (in liq) (1992) 10 ACLC 929 at 932.

[2] Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd & Ors (1996) 65 FCR 234 at 241; 144 ALR 159 at 165-6.

[3] Mamone & 1 Ors v Pantzer [2001] NSWSC 26.

[4] Mamone & 1 Ors v Pantzer [2001] NSWSC 26 at 9.

[5] Perpetual Nominees Ltd v McGoldrick & Anor (No 3) (2017) 317 FLR 227; (2017) 120 ACSR 32 and Mills v Sheahan (2007) 99 SASR 357; (2007) 214 FLR 367; [2007] SASC 365.

[6] Macks v Viscariello (2017) 130 SASR 1; (2017) 353 ALR 201; [2017] SASCFC 172 and Seaman v Silvia [2018] FCA 97.

Please get in touch with a member of our Restructuring & Insolvency team for more information.

By Sam Kingston

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