Supervision of Liquidators - Hall v Poolman (The Appeal)

This recent decision demonstrates the unusual nature of Section 536 and its application to the supervision of Liquidators. The public interest considerations which are applicable in corporate and personal insolvencies and important matters for Liquidators and Trustees to have regard. These public interest considerations are also dealt with by the Code of Professional Practice.

Decision at first instance

The Liquidators of two companies commenced legal proceedings against the directors of the companies. A litigation funding agreement was approved to pursue the proceedings. However, the Liquidators formed the view that a return to creditors from the proceedings were likely to be very low.
The directors argued under Sections 1317S and 1318 of the Corporations Act 2001 (Cth) ("the Act") that they should not be held liable when the majority of the litigation proceeds would go to the Liquidators and litigation funders with little prospect of a return to the creditors. Whilst this argument was rejected by the trial judge, he considered that the actions of the Liquidators warranted further inquiry. Accordingly an inquiry was ordered pursuant to sections 536(1)(a), 536(1)(b) and 536(3) of the Act
The Liquidators were successful in the proceedings and the costs of proceedings and Liquidator's fees were settled.
The Liquidators appealed from the decision to order an inquiry upon the basis that the trial judge did not apply a proper construction of section 536 and did not properly exercise the discretion under section 536.

The Appeal

Leave to appeal was granted upon the basis, among other things, that:

Section 536 does not require prima facie evidence that there has been a lack of faithful performance or observance of requirements. An applicant must demonstrate something about the Liquidator's performance of duties or observance of requirements that is a sufficient basis for making an order for an inquiry to be conducted. The Court then has a discretion which it must exercise.
A Liquidator may legitimately, and in accordance with his or her duties, pursue litigation aided by a litigation funder even if there is little or no likelihood of recovery (save for recovery of his own costs and expenses and the funder's fees) so long as certain provisos are met.
The public interest in the Liquidators pursuing proceedings against the directors is a relevant factor to be taken into account in the exercise of the discretion however, the trial judge did not give weight to the public interest consideration and, accordingly, the exercise of the discretion miscarried.
There is no obligation upon Liquidators to apply to the Court for directions as a matter of course before entering into a litigation funding agreement. The decision whether to do so is based upon the Liquidator's duties of skill, care and diligence. The trial judge erred in suggesting that Liquidators should approach the Courts as a matter of course before entering into a litigation funding agreement. This was a material factor to his decision to order an inquiry and, accordingly, the exercise of the discretion miscarried.
Whilst it was open to the trial judge to order an enquiry, the Court found that there was no utility in ordering the inquiry. The costs of the proceedings and Liquidator's fees were settled, which removed the purpose of the inquiry
On a side note, the Court was also critical that ASIC failed to assist the Court given the issues under consideration