INSOLVENCY UPDATE: Liquidator appointed despite remuneration dispute

In Hurst v Bar Machiavelli Pty Limited ACN 609 268 037 (No 2) [2018] NSWSC 1549, the New South Wales Supreme Court considered whether an administrator of a company should be appointed as liquidator in circumstances where there is an ongoing dispute about the fees and costs incurred by that potential appointee during the period of administration.

Background facts

The principal business of Bar Machiavelli Pty Limited (Company) was managing a restaurant in Rushcutters Bay, Sydney.

On 12 June 2018, the sole director of the Company (Director), appointed the plaintiff, Mr David Hurst (Mr Hurst) as voluntary administrator of the Company.  Prior to the first creditors’ meeting (First Meeting), some key creditors of the Company (who, relevantly, were also unit holders in a unit trust of which the Company was the trustee and pursuant to which it operated the business) entered into an agreement whereby:

• debts owed to those creditors were paid;
• debts owed to any other creditors were not paid; and
• the business of the Company was transferred to a third party,

the effect of which being that the Company was (amongst other things) unable to meet its obligations to those creditors not a party to the agreement, and to pay Mr Hurst’s fees under section 443D of the Corporations Act.¹ 
At the First Meeting, the creditors voted to bring an end to the administration.

Mr Hurst subsequently brought proceedings and Parker J appointed him as provisional liquidator on 4 October 2018.

The argument

Rich Text Editor, editor4Mr Hurst then applied for orders winding up the Company in insolvency, and the Director was granted leave to appear through counsel. 

It was common ground that the Company was insolvent.  However, the Director disputed the appropriateness of the fees and expenses incurred by Mr Hurst during the Company’s administration and opposed his appointment as liquidator.  The Director argued that it would be preferable in the circumstances to appoint an independent liquidator, as Mr Hurst was in a “position of conflict between his interest in maintaining his claims for fees and costs which he has incurred, on the one hand, and his duty to creditors to minimise the costs in the administration on the other”.²

The decision

Parker J found in favour of Mr Hurst, appointing him as liquidator on the following basis:

• Generally speaking, it is normal for an administrator to be appointed as a liquidator when the company in question is wound up.
• Even where there is a potential conflict, or even an actual conflict, the Court does not automatically remove a liquidator. The Court has wide powers to manage such situations, including giving directions to a liquidator or in appropriate cases appointing a special purpose liquidator. 
• Mr Hurst was familiar with the Company’s affairs following the period of administration, and the dispute regarding his fees was not enough to outweigh the benefit of that familiarity.

Guidance

This decision provides some important guidance to external administrators, emphasising that the Court will not automatically appoint an alternative liquidator simply because there is a dispute about the fees and expenses incurred by the proposed appointee in his or her capacity as administrator.