A liquidator has many competing duties and pressures in the performance of their role. Can the failure to make a simple phone call be a breach of those duties?

In Asden Developments Pty Ltd (in liq) v Dinoris (No 3)¹ a liquidator was found to have breached his duty as an officer under section 180 of the Corporations Act 2001 (Cth) (Act) to act with care and diligence by, in effect, failing to personally call a company director to enquire about a transfer of company funds made shortly prior to the liquidation.

After the much discussed decision in Viscariello v Macks², liquidators will be aware that they may breach their statutory duty of care and diligence by failing to ensure proportionality in the conduct of the liquidation. In Viscariello the court confirmed that liquidators have heavy responsibilities and that independence, impartiality, skill and diligence are critical.

The Asden decision emphasises that liquidators need to be constantly vigilant and that even a seemingly small omission can have serious consequences.

Key points

1. A liquidator may breach their duties by not taking all reasonable steps to recover the assets of the company, even if the step is as simple as making personal contact with a party
2. Whilst the liquidator in Asden was ultimately not liable to compensate the company, there may be costs consequences arising from the breach
3. Liquidators do not have the same duty as controllers when selling assets, but are still open to criticism by interested parties.

The decision

The claims related to two transactions:

1. the transfer $236,500 out of Asden’s bank accounts immediately before Asden's liquidation
2. the sale of a boat that was owned by Asden after its liquidation.

The replacement liquidator of Asden claimed the prior liquidator failed to take any, or any adequate, steps to recover the funds transferred and failed to properly supervise the sale of the boat in breach of his duty under section 180.

In short, the relevant circumstances were:

1. the liquidator was aware $236,500 had been withdrawn from Asden’s bank account on the day before its liquidation
2. the liquidator knew the sole director and shareholder of Asden was the person most likely to have transferred the funds and that her signature appeared on the relevant withdrawal slip
3. the liquidator spoke to the director's advisor to try to confirm the destination of the funds. The liquidator was told the director did not hold the funds 'personally' and that he should investigate the withdrawal of the funds
4. despite the director being the most obvious person with information about the withdrawal of the funds, the liquidator did not take any steps to speak to her
5. prior to the sale of the boat the director used funds from the $236,500 to pay out a creditor with security over the boat. The proceeds from the sale were used to repay her and approximately $10,000 were paid to the director's advisor for costs of assisting in repossessing the boat.

Breach of the act

The court found that the liquidator breached section 180 of the Act by not attempting to make direct personal contact with the director to enquire about the withdrawal of the funds. The court relevantly stated that:

1. it was reasonable for the liquidator to review the company’s records and then to seek funds to conduct a public examination of the director, but this was no substitute for a timely personal enquiry of the director
2. it was immaterial that the liquidator was not confident the director would give him any information
3. the prospect that the director would disperse the funds did not justify the liquidator not enquiring of her about their withdrawal.

Regarding the boat, the court found the liquidator had not breached his duties because:

1. he appointed an auctioneer to collect the boat and sell it and there was no suggestion that the auctioneer did not act competently and diligently
2. the liquidator was not then required to supervise the auctioneer in his conduct of the sale
3. the liquidator was entitled to agree to the director receiving payment from the proceeds of the sale as her payment of the secured debt allowed the sale to proceed
4. no issue arose from the payment to the director's advisor as it was a matter for the auctioneer to consider whether this was a proper sale cost.

Consequences of the breach

Asden alleged that if the liquidator had contacted the director the funds would have been recovered. Asden relied on evidence from the director that if the liquidator had contacted her she would have paid the funds to the liquidator. However, the director had not complied with pre-liquidation demands that the funds be returned, nor had she disclosed the existence of the funds in the Report as to Affairs.

In order to be liable to compensate Asden, it was necessary that there be some 'common sense' link between his breach and the damage (causation). The director's evidence was clearly hypothetical and given with the benefit of hindsight, and the court ultimately found that it was likely that she would not have paid the funds to the liquidator if he had contacted her.

The liquidator escaped liability as Asden was unable to show that its damage resulted from his breach of his duties.

Implications

Finding that the liquidator breached his duties by not making a telephone call may seem a harsh outcome. However, the decision emphasises that liquidators need to be constantly vigilant and that even a seemingly small omission can have serious consequences.

Ultimately the liquidator was not liable to compensate Asden, however the Asden proceedings may also have costs consequences for the liquidator (the court reserved the question of costs).

The Asden decision is also a reminder that liquidators owe duties to the company, its creditors and contributories in relation to the sale of the company's assets. Liquidators are not subject to the duties on the sale of assets found in section 420A of the Act and courts are generally reluctant to second-guess a liquidator's commercial judgment, even if a decision is not fully reasoned or investigated³. However, liquidators remain open to criticism by interested parties and should ensure that an appropriate sale process is conducted to avoid issues arising.

[1] [2016] FCA 788.
[2] (2014) SASC 189.
[3] See for example Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd): In the matter of Bonython Metals Group Pty Ltd (In liq) [2013] FCA 349.