Provisional liquidators in shareholder disputes

The appointment of a provisional liquidator may be appropriate in shareholder disputes if there are genuine concerns that there is a risk a company’s assets will be dissipated, there are potential solvency concerns and all other alternatives have been exhausted. The appointment of a provisional liquidator by a Court has been said to be ‘a drastic intrusion into the affairs of the company’^[1]and is not an order that is made without serious consideration.

Section 472(2) of the Corporations Act 2001 (Cth) grants a Court power to appoint a provisional liquidator and provides that:

“The Court may appoint a registered liquidator provisionally at any time after the filing of a winding up application and before the making of a winding up order or, if there is an appeal against a winding up order, before a decision in the appeal is made.”

Notably a provisional liquidator can only be appointed after filing a winding up application before a winding up order is made. In other words, is an interim step.

Threshold requirements

The appointment of a provisional liquidator is a discretionary remedy. A provisional liquidator will not usually be appointed unless it appears, from the evidence, reasonably likely that a winding up order will be made.^[2] In the case of Australian Securities Commission v Emad Kamel Solomon & Ors [1998] FCA 214 (20 February 1998), it was said that any person seeking to appoint a provisional liquidator must show that there is a real and present threat to a company’s assets were the status quo to continue.^[3]

Circumstances that a Court will take into consideration in exercising its discretion

The circumstances that the Court will take into consideration in making a decision to appoint a provisional liquidator include:

the degree of urgency established by the applicant;
whether the respondent’s assets need to be protected from dissipation or seizure;
whether the company may be paralysed by a dispute between shareholders and directors;
suspicious circumstances disclosed by the evidence warranting appointment;^[4] and
the extent to which the appointment of a provisional liquidator will impede a company’s normal operations.^[5]

Categories of cases relating to the conduct of the Parties

The following cases are illustrative of the circumstances the Court took into account to appoint a provisional liquidator:

Assets not in jeopardy – Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80;
Breaches of statutory or fiduciary duties by Directors – Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13 (2002) 40 ACSR;
Misappropriation of funds – Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452; Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483 Payment of funds contrary to the interlocutory orders designed to preserve the status quo;
Lack of urgency – Allstate Exploration v Batepro [2004] NSWSC 261; and
Suspicious circumstances – Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483; Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 [866].

Misappropriation of funds

In the case of Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, a director that had misappropriated/misused company funds and assets was held to have breached his fiduciary duties. The alleged acts of oppression were:

misuse of money and assets of the company;
failure to call general meetings and directors’ meetings and/or to give notice of such meetings to the plaintiff;
failure to keep proper accounting and other records of the company;
failure to provide the plaintiff with access to the records of the company; and
other matters, such as a purported transfer of ten shares between the second and third defendants and the appointment of the second defendant as manager.

These actions were mainly alleged against the second defendant, Mr Harte. The plaintiff alleged that several transactions amounted to misuse or misappropriate use of company of company assets. Although each breach on its own was not sufficient to amount to oppression, it was found that the cumulative effect was sufficient.

Suspicious circumstances disclosed by evidence warranting appointment

In Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483, Tamberlin J provided at [9] that the authorities indicated that the Court will not generally appoint a provisional liquidator unless there is reasonable prospect that a winding up order will be made.^[6] It was further stated that an applicant must show some good reason for the intervention by way of the discretionary remedy, prior to the final hearing on the winding up application to demonstrate that the appointment is needed in the public interest or to preserve the status quo or to protect the company’s assets and affairs.^[7] In this case, it was said that:

“Due to the respondents’ failure to comply with the Orders of the Court, he has a real fear that the assets of the second and third respondents will be in jeopardy unless a provisional liquidator is appointed.”^[8]

Takeaways on financial impropriety

Where there is evidence of financial impropriety and a genuine risk that directors will dissipate assets, a provisional liquidator may be appointed with the consequence that their malfeasance may be revealed. Making an application to wind up a company on just and equitable grounds pursuant to section 461(k) of the Corporations Act 2001 (Cth) comes with risks.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Allstate Exploration v Batepro [2004] NSWSC 261

Australian Securities Commission v Emad Kamel Solomon & Ors [1998] FCA 214 (20 February 1998)

Beautree Pty Limited, in the matter of Willow Glade Pty Limited v Willow Glade Pty Limited [2009] FCA 738

Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625

Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483

Professional Services Of Australia Pty Ltd -V- Computer Accounting And Tax Pty Ltd [2010] WASC 38

Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd [2002] NSWSC 13 (2002) 40 ACSR

Further information about a directors dispute or an oppression matter

If you need advice on appointing a provisional liquidator in a shareholder’s dispute because you are concerned about asset dissipation, contact us for a confidential and obligation-free discussion:

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au

Disclaimer

This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Allstate Explorations NL v Batepro Australia Pty Limited [2004] NSWSC 261 [30].

[2] Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732 [636].

[3] Australian Securities Commission v Emad Kamel Solomon & Ors [1998] FCA 214 (20 February 1998) [80].

[4] Riviana (Aust) Pty Ltd v Laospac Trading Pty Ltd (1986) 10 ACLR 865 [866].

[5] Re McLennan Holdings Pty Limited (1983) 1 ACLC 786 [788].

[6] Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483 [9]citing Tickle v Crest Insurance Co. of Australia Limited (1984) 2 ACLC 493 [494].

[7] Allstate Explorations NL v Batepro Australia Pty Limited [2004] NSWSC 261 [30].

[8] Emmacourt Pty Limited v Jewels of Australia Pty Limited [2007] FCA 1483.