The powers that a liquidator may exercise in a winding-up are detailed in the Corporations Act 2001 (Cth) (“the Act”).  The scope of those powers depends upon whether:-

1. the liquidation is a creditor’s voluntary liquidation (often known as a “CVL”) which is initiated by the company itself; or
2. a court ordered winding up in insolvency, which typically results from the issue of an originating process against a company relying on a presumption of insolvency or some other grounds.

Liquidator’s additional powers under a court ordered winding-up

There are rights that a liquidator has only in a court ordered winding-up including:-

1. The liquidator does not have to call creditors meetings unless a matter requires creditors approval (or the creditor’s pass a resolution requiring a meeting to be held or 1/10^th value of creditors request a meeting);
2. The liquidator has additional recovery powers under the Act, such as the voiding of circulating floating interests (formerly floating charges) created 6 months prior to the relation-back day) under s.588FJ of the Act and the voiding of certain dispositions of the company under s.468 of the Act; and
3. The liquidator may have the benefit of a directors’ and officers’ liability (“D&O”) policy taken out by the company prior to the winding-up.

If, during a CVL, a liquidator identifies that there are possible benefits in relation to a D&O policy, or additional recoveries that would be available under s.588FJ or s.468 of the Act, they should consider making an application to the court to convert the CVL to a court-ordered winding up under ss 459A, 467B and 459P(1)(e) of the Act.

Discretion of the court

In order to succeed in a conversion application, the liquidator will need to satisfy the court that it should exercise its discretion under s.459A of the Act, which states:-

“On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency.”

Generally, in a conversion application the applicant liquidator should demonstrate to the court that:-

1. the company was insolvent at the date when the application was filed and at the date of the hearing of the application;
2. there is a “good reason” to make the order;
3. there is a rational possibility that a liquidator will ultimately commence proceedings that rely on a liquidation being a court ordered winding-up; and
4. there has not been an undue delay by the liquidator in making the application.

The cases of Carter v New Tel Ltd [2003] NSWSC 128 (“Carter”), CBA Corporate Services (NSW) Pty Ltd and Ors v Walker & Ors [2013] FCAFC 74 (“Walker”) and Re Green (as liquidator of  Australian Resources Limited (in liq)) [2004] NSWSC 1095 (“Australian Resources”) provide useful examples of situations where the court will consider a conversion from CVL to a court ordered winding-up justified.

Ground 1 – Proving insolvency

A solvency report admissible and compliant with the principles of Makita v Sprowles [2001] NSWCA 305 and the Expert Witness Code of Conduct at Schedule 7 to the Uniform Civil Procedure Rules 2005 (NSW) is essential to meeting the first ground of a conversion application.

Ground 2 – Good Reason

In Walker, the Full Federal Court said that a “good reason” for the conversion to a court ordered winding-up is not strictly required since:-

“the correct approach in determining the scope of a statutory discretion which is unconfined by express statutory criteria is to ascertain the factors that may be taken into account by reference to the subject matter, scope and purpose of the statutory provision.”

According to the court, to do otherwise would “displace or distort the otherwise broad discretion conferred by s.459A”.  It remains essential in practice to seek to establish a “good reason” for the court to exercise discretion in favour of the conversion.   These reasons will usually include that the liquidator has additional recovery options that are only available in a court ordered winding up that may improve the dividend to unsecured creditors if they are successful.

In the Carter case there were several “good reason” put forward to support the application:-

1. two floating charges were in place that, if successfully attacked under s.588FJ would have substantially benefited the unsecured creditors;
2. The liquidators were concerned that a particular interpretation of a D&O policy would cause it to respond to insolvent trading claims by a liquidator, but only if that claim was brought in a court ordered winding up, not if the same claim was brought under a CVL; and
3. There was a disposition of customer information by the company to another telephone company that the liquidator wished to challenge under s.468.

In Australian Resources, the liquidators had been appointed to two companies under CVLs.  Similar to Carter, the D&O covering the directors policy might only respond if insolvent trading claims were made by a liquidator in a court ordered winding up, and not in a CVL.  The court considered that the increased prospects of the insolvent trading claim being covered by the policy was a good reason, and did not make a determination as to whether the D&O policy in fact applied only in the event of a court ordered winding up.

In Walker, the liquidators of the ABC group of failed companies wished to pursue a syndicate of lenders to the failed company under s.588FJ of the Act. Again, the court considered the possibility of a substantial benefit to unsecured creditors if the action against the lenders was successful.  In this case it is worth noting that the unsecured creditors were expected to receive nothing if the conversion application did not succeed; the claim against the lenders was in the order of $100 million dollars and the liquidation was a complex one involving a great many insolvent companies within the ABC group.

Ground 3 – Rational possibility of commencing proceedings

A liquidator seeking to convert a CVL to a court ordered winding up does not need to commit to taking action only available under a court ordered winding up, and can rely on the rational possibility, rather than certainty, that they will commence proceedings.

This means that the court, when considering an application, does not need to be convinced that any foreshadowed action will actually occur.

For example, in Carter the liquidator had not yet formed a final position on whether the two floating charges in that case could be challenged under s.588FJ, but the court considered there was at least a plausible basis to attack the charges.

In Walker, the court (and Full Court on appeal) indicated a liquidator should not be required to spend considerable cost establishing the prospects of a potential s.588FJ claim until “the door has been opened” by the CVL being converted to a court ordered winding up.

Ground 4 – Delay

As with many discretionary powers, the court is unlikely to favour applications that have been the subject of undue delay.  In each case the issue of delay is to be considered on the facts.

For example, in Walker, there was a 15 month delay in the liquidator’s appointment and the application for conversion.  The purpose of the conversion application was so that the liquidators could pursue claims against lenders to the insolvent company under s.588FJ.  The lenders predictably opposed the conversion application and argued that the delay in the application being brought prejudiced their position and was unreasonable.

At first instance and on appeal, the court did not consider the liquidators’ delay as significant, but considerable costs were expended by the liquidators in fighting the delay argument.  Any application should be brought as soon as possible to avoid giving any potential defendants grounds to oppose the conversion.

By contrast, in Carter, the liquidators made an application for conversion less than a month after their appointment, which was very quick in the circumstances. No opposition on the grounds of delay were taken in that case.

Impact of conversion on commencement date of the liquidation

If a conversion application is granted under s.459A, the winding up is taken to have commenced at the time specified by s.513A, which is the date that the earlier winding up commenced and the relation-back day is calculated from that day.

Conclusion

Liquidators identify potential recoveries as they conduct investigations into a company.  Where there are prospects of additional recoveries being made under s.588FJ or s.468 of the Act, an application for a conversion from CVL to court ordered winding up should be considered quickly in order to broaden the liquidator’s potential recovery powers and potentially increase the dividend (or prospects of a dividend) to unsecured creditors.