It is not uncommon for insolvency practitioners to be appointed to act as a liquidator to multiple companies within a corporate group where there are several wholly owned subsidiary companies. Once appointed, they discover that those companies are a creditor or debtor of others within a corporate group – for example, if there are service companies which employ staff and a separate operating company which may have inter-related corporate borrowings. The insolvency practitioner is now potentially in a position of conflict, because the practitioner must prepare various proofs of debt and then adjudicate on the very same proofs.
There is however a way for a liquidator and trustee of a creditors' trust to manage this conflict, as shown in the recent New South Wales Supreme Court decision of Justice Black on Go Energy Group Ltd (In liquidation) [2019] NSWSC 558 (Clayton Utz acted for the successful liquidator).
Go Energy Group loses steam
Paul Weston was appointed as voluntary administrator and subsequently liquidator of Go Energy Group Ltd (In Liquidation) (GEG) and various wholly owned subsidiaries of GEG (Companies). Mr Weston was also appointed to act as trustee of separate creditors' trusts in relation to two other subsidiaries of GEG, Go Energy Pty Ltd (GEPL) and Go Markets Environmental Trading Pty Ltd (GME).
Mr Weston formed the view (correctly) that he was conflicted where he had both caused proofs of debt to be lodged in respect of the Companies, GEPL and GME and would be required to adjudicate on the proofs. He also had a financial interest in the outcome of the adjudication where he had unpaid remuneration claimed in respect of the Companies, GEPL and GME, parts of which have been approved and parts of which have been paid. For this reason, Mr Weston sought directions from the Court, relying the inherent jurisdiction of the Court to grant authorisation for conduct that would otherwise involve a conflict, and sought dispensation from his fiduciary duties.
Mr Weston investigated the inter-company loans between the Companies, GEPL and GME, prepared the relevant proofs of debt and retained Mr Anthony Elkerton, an experienced registered liquidator, to consider the proofs of debt and express a view as to whether they are properly debts which should be admitted in liquidations of the Companies and the creditors' trusts. Mr Weston also led evidence of the substantial amounts of external creditors of GEG and GEPL and the lesser but still substantial amounts of creditors of the Companies and that he would admit each of the external creditors' proofs of debt in the amounts determined by Mr Elkerton in his expert report. Further evidence was led by Mr Weston that he anticipated that after payment of estimated costs of the liquidation, there would be no return to creditors of GME and a lesser and very small return to creditors of the Companies.
The Court approves of Mr Weston's solution
The Court agreed that Mr Weston rightly recognised that it would have been inappropriate for him, as liquidator of one of the Companies and GEPL and GME, to lodge a proof of debt and then decide whether to accept that same proof of debt in his capacity as liquidator of another of the Companies and GEPKL and GME.
The Court was satisfied that Mr Weston properly sought the relevant directions given the conflicts of duty and interest that would affect his decision whether to allow the proofs of debt. Having regard to the evidence, it made directions that that Mr Weston was justified in admitting several proofs of debt in the liquidation of the Companies relating to inter-company loans between the Companies and GEPL and GME, and in relation to the separate creditors' trusts as modified by Mr Elkerton's analysis.
Justice Black found:
- Mr Weston and his legal representatives properly recognised that the task of explanation inherent in a request to be excused from a fiduciary requirement was an onerous and exacting one;
- in relation to the Companies, the Court had previously been satisfied that the appointment of a special purpose liquidator to address conflicts would have been an unwarranted additional burden on creditors;
- in relation to the creditors trusts, although Mr Weston (as trustee) had an absolute discretion to admit creditors' claims, Mr Weston was correct to proceed on the basis that his exercise of that discretion may also be subject to fiduciary obligations, and to seek advice from the Court in respect of that exercise of that discretion where he faced conflicts of duty and interest.
Finding a way through the conflicts
The decision in the Go Energy Group is an important one for insolvency practitioners, who now have guidance on how to manage the conflicts that can arise when acting as liquidator to multiple companies within a corporate group. It confirms that he or she will be acting properly as a liquidator of several of the companies in admitting several proofs of debt in the liquidation of the companies by:
- retaining an expert to opine on the proofs of debt; and
- then seeking directions from the court under section 90-15 of the Insolvency Practice Schedule (Corporations) (instead of seeking to appoint a special purpose liquidator) and sections 63 and 81 of the Trustee Act 1925 (NSW).