When to consider a special purpose liquidator

Occasionally we are approach by accountants and advisors in our network to discuss the conduct of other liquidators who are winding up companies that owe money to their clients.

Amendments to the Corporations Act in 2017 give creditors a far higher degree of influence in relation to external administrations, including the right to remove a liquidator and to request meetings and information.  

Another right is for creditors to apply to the Court to make in inquiry into the conduct of an external administration under section 90-10 of the Insolvency Practice Schedule (Schedule 2 to the Corporations Act).

Recently, the Federal Court (‘Court’), in Markey (Liquidator), in the matter of Bestjet Travel Pty Ltd (in liq) v Bestjet Travel Pty Ltd (in liq) [2020] FCA 1881 (‘Bestjet’), considered the circumstances in which it was appropriate to appoint a Special Purpose Liquidator (‘SPL’).

The Court noted that a SPL is most commonly appointed when a liquidator is prevented from undertaking investigations due to an actual, or perceived, conflict and where it is useful and just that certain matters be investigated by a different liquidator.

Furthermore, the Court set out a number of factors which ought to be considered when determining whether or not a SPL is to be appointed. These factors included:

• Whether the plaintiff has identified the specificity of the ‘special purpose’ for which the appointment is sought;
• Whether the appointment of a SPL would ensure the ‘confidence in the integrity, objectivity and impartiality of the administration is maintained’;
• Whether the special purpose is ‘substantial and serious’; and
• The public interest.

In handing down its decision in Bestjet, the Court identified three options for dealing with a conflict of interest, which had previously been adopted in earlier cases heard by the Court. The Court can address an actual or perceived conflict of interest:

1. By an order for the appointment of a SPL to determine the particular issue which has created the conflict of interest and only that interest.
2. By a direction to the conflicted liquidator that he/she would be justified in performing an act which would otherwise involve a conflict.
3. By an order removing the conflicted liquidator from one or more of the companies and appointing a new liquidator in his/her place.

However, it must be noted that each of the above three options are to be considered in conjunction with any case specific factors, such as:

• Whether the appointment of a SPL would generate any additional cost burden on creditors; and
• The complexity of the matter which gives rise to any potential conflict of interest.

So if you come across a client tied up in an external administration who is not totally satisfied with the conduct of the incumbent appointee, be aware of this option for your client to intervene and bring some objectivity to a situation in which impartiality may be lacking.