Court denies liquidator’s appointment due to lack of independence

The recent Federal Court (Court) decision of Hooke v Bux Global Limited (No. 6) [2018] FCA 1545 provides liquidators with a reminder, in no uncertain terms, about the importance of liquidator independence and the Court’s perception of liquidator independence.

In this case, Colvin J (amongst other things) held that a potential appointee as liquidator of Bux Global Limited (Company) did not meet the requirement of being independent and being seen to be completely independent for the purposes of undertaking the liquidation of the Company.¹

Background facts

The principal business of the Company was related to a mobile phone application which was intended to simplify the international transfer of funds by providing a platform whereby users could transfer funds in different currencies from one account to another within the application (App).

To enable the development of the App, the Company had raised funds in the region of $65 million from investors, on the basis of representations that the company that would actually manage the App would undergo an initial public offering (IPO) and that the investors would hold shares in that company (App Company).  The IPO never took place, and the Company made offers of shares in breach of the fundraising provisions in the Corporations Act.² 

The directors of the Company engaged in other, questionable behaviour, including:

• taking steps to ‘phoenix’ the App Company into another company;
• entering into a licence agreement whereby the counterparty, 2WayWorld may take over the assets of the Company in the event that certain costs were not met by the Company; and
• using funds raised for the development of the App to meet personal expenses.

Questions were also raised as to whether the App was even operational – the administrator of the Company at the time, Mr Beattie gave evidence that he was unable to locate the App on either the Android or Apple App Stores.

On 4 October 2018, the same date on which Mr Beattie was appointed administrator of the Company by its directors, Colvin J made orders appointing Martin Jones (Mr Jones) and Andrew Smith (Mr Smith) provisional liquidators of the Company.  Those orders were then stayed.

 The decision

Mr Beattie put forward number of reasons as to why he should be appointed, including (but not limited to) that:

• he was suitably qualified;
• he had undertaken a significant amount of work in investigations since his appointment and there would be a duplication of costs if another practitioner was appointed;
• the Company’s registered office and business appeared to have been conducted out of offices in New South Wales (where Mr Beattie was based);
• he was capable of bringing an independent mind to the appointment; and
• he had possession of a number of books and records of the Company.³

In making his decision, Colvin J cited a number of well established authorities in emphasising that, first and foremost, liquidators must be independent and be seen to be completely independent.⁴

In response to Mr Beattie’s claim that it was not unusual that the directors of the Company specifically selected him to be appointed as liquidator of the Company, Colvin J noted that this was “no ordinary liquidation”.⁵ To that end, it was held that in order to determine whether a potential appointee satisfies the requirement of independence, the question must be viewed in the context of the particular circumstances in which the company is being ordered to be wound up.⁶

Further, Shampagne Australia Pty Ltd (Shampagne Pty Ltd), which claimed to be a secured creditor of the Company, provided Mr Beattie with an up-front payment of $60,000 for Mr Beattie’s initial remuneration and expenses relating to the administration of the Company.  However, Shampagne Pty Ltd was found to be a company related to the Company.

The Court ultimately found that the Company had been trading solely through financial support given by Shampagne Pty Ltd, and as a result, took the view that Mr Beattie did not meet the requirement of being seen to be completely independent for the purposes of undertaking the liquidation of the Company.

Mr Jones and Mr Smith were subsequently appointed as joint and several liquidators of the Company.

Lavan comment

This decision provides an important reminder to practitioners about their ability to accept appointments in situations where it is possible that doubt may be cast on their independence.

This decision also acknowledges that the Court’s view of the independence of a potential appointee will be influenced by the context and circumstances surrounding the distressed company. First and foremost, liquidators must be independent and be seen to be completely independent.