TGIF 28 May 2021 – Court considers whether inquiry should be launched into liquidator’s conduct

This week’s TGIF considers David Djordjevich v Richard Trygve Rohrt in his capacity as liquidator of ACN 091 518 302 Pty Ltd (in liq) ACN 091 518 302 [2021] VSC 178, a Victorian Supreme Court decision that focuses on the circumstances in which a court will order an inquiry into the conduct of a liquidator and the interests that such an inquiry is intended to serve.

Key takeaways 

• The purpose of the power in clauses 90-10, 90-15 and 90-20 of the Insolvency Practice Schedule is to serve the public interest by advancing and promoting the regulation, supervision, discipline and correction of liquidators in the interests of honest and efficient administration of companies in liquidation.
  
  
• It is the applicant for an inquiry who bears the burden of persuading the Court that there is a ‘complaint’ such that the jurisdiction of the Court is invoked. The applicant must show there is a prima facie case that something needs to be investigated.
  
  
• This decision (and others like it) have emphasised the importance of context in considering what a liquidator ought properly to have done, once an inquiry is ordered, including whether or not a liquidator has funds.

What happened?

The plaintiff (Mr Djordjevich) applied for an order that the Court conduct an investigation into the liquidation of ACN 091 518 302 Pty Ltd (the Company) pursuant to clause 90-10, 90-15 and 90-20 of the Insolvency Practice Schedule (IPS) which forms part of the Corporations Act 2001 (Cth) (the Act) (the Application).  

Mr Djordjevich sought other orders, including that the defendant, Mr Rohrt (the Liquidator), pay compensation to Mr Djordjevich and to the Company for his conduct as liquidator.

Clause 90-10(1) of the IPS provides that the Court may inquire into the external administration of a company on the application of a person with a financial interest in the administration of that company. There was no contest that Mr Djordjevich was a person with such an interest.

Mr Djordjevich contended that an inquiry should be commenced on the basis of allegations of:

• improper delegation by the Liquidator of work to solicitors;
  
  
• unnecessary and excessive costs and expenses being incurred;
  
  
• failure to prosecute proceedings on behalf of the Company; and
  
  
• a lack of good faith concerning a proposed assignment of a particular cause of action available to the Company,

(together, the Complaints).

Applicable principles

The Court observed, and the parties agreed, that the previous decision of Westpoint Corporation Pty Ltd (in liq) v Yeo [2018] VSC 705 (Westpoint), (in the context of the predecessor legislation to clause 90-10 of the IPS) described a three stage process for an application of this type:

• the first stage is the determination as to whether to conduct an inquiry into the conduct of the liquidator;
  
  
• the second stage is the inquiry into the conduct of the liquidator; and
  
  
• the third stage is the determination of the appropriate orders.

The process is part of the supervisory jurisdiction of the Courts with respect to winding up and is directed to the “regulation, supervision, discipline and correction of liquidators in the interests of honest and efficient administration of the estates of companies subject to winding up”.

Clause 90–15 of the IPS lists the matters which the court may take into account when making orders in relation to the external administration of a company, including whether the liquidator has faithfully performed his or her duties and, separately, whether an action or failure to act by the liquidator is in compliance with the Act and the Insolvency Practice Rules (Corporations) 2016 (Cth).

In considering that question, the Court observed (adopting a passage of Barret J in BL & GY International [2010] NSWSC 959) that the conduct of a liquidator ordinarily needs to be viewed in context:

“Leaving to one side matters of dishonesty, lack of due care and obvious failure to address the decision at hand, it can never be said in the abstract that a liquidator who fails to take a certain step (or, for that matter, one who takes a certain step) thereby engages in misconduct. Context is all-important.”

In an application of this nature, it is the plaintiff who bears the onus of demonstrating to the Court that there a compliant that needs to be investigated. It is only having received such material that the Court is empowered to order an investigation into that conduct.

Mr Djordjevich submitted that the Complaints invoked the Court’s jurisdiction to order the inquiry.

Decision

The Court was “left in no doubt” that the Application must be refused. The Court was not satisfied that the Liquidator had failed to comply with the Act or that he had failed to fully and faithfully perform his duties as liquidator.

After considering each of the Complaints independently his Honour, Delany J, found them each to be without substance and said that:

• the Complaints made by the plaintiff reflect his dissatisfaction with what has occurred in relation to the Company;
  
  
• the Complaints are matters personal and peculiar to Mr Djordjevich; and
  
  
• in reality, the Application sought to vindicate private rights.

Delany J also found that even if he were satisfied the Complaints were something that required an inquiry (which his Honour was not), as a matter of discretion, it would be inappropriate to order an inquiry in this case. This was because there was nothing in the evidence to suggest that it is in the public interest to conduct an inquiry.   

His Honour observed that it is the applicant for the inquiry who bears the burden of persuading the Court that there is a relevant ‘complaint’ and that burden had not been satisfied in the present case.

The Court refused to order an inquiry and dismissed the proceedings, including Mr Djordjevich’s claim for compensation.

Comment

Applications under Clause 90-10(1) of the IPS will not be successful if directed towards the vindication of personal rights. In considering such applications, the Court must be given some material to suggest that it would be in the public interest to conduct the inquiry sought.