An ex tempore decision of the Supreme Court of Victoria has affirmed the obligation on liquidators to be mindful of conflicts, and potential conflicts, between their own interests and their duties when applying for directions.
Background
The decision In the matter of Gunns Plantations Limited (in liquidation) (receivers and managers appointed) (ACN 091 232 209) [2013] VSC 595 (Gunns) concerned an application by the liquidators of Gunns Plantations Limited (Liquidators) to the Court under section 511 of the Corporations Act 2001 (Cth) (Act) seeking the Court’s direction and approval of the exercise of the Liquidators' powers.
Gunns Plantations Limited was the owner of various plantations which were part of several managed investment schemes formerly operated by Great Southern Managers (Aust) Limited.
The Liquidators had entered into a contract of sale (Sale) with the Trust Company (Aust) Limited in respect of timber plantations which were owned by Gunns Plantations Limited.
The Liquidators sought the Court’s approval and direction under section 511 of the Act in relation to the entry into the Sale and the allocation of the proceeds of sale between the various managed investment schemes.
While the Court approved the process by which the Liquidators entered into the Sale, it found against the Liquidators in respect of the balance of the application because:
the relief sought by the Liquidators was not a condition of the Sale;
the process by which the proceeds of the Sale were allocated had been compromised; and
adequate notice had not been given to the growers.
Advertising
The Court noted that some steps had been taken by the Liquidators to inform creditors and growers of the application, namely that a website had been created and an advertisement had been placed in The Australian newspaper.
However the Court made the following findings in respect of the advertising:
the newspaper advertisement, while generally informing readers that a hearing was to commence on 16 December 2013, omitted any reference to the Liquidators’ application for directions and approval in respect of the allocation of proceeds from the Sale; and
the newspaper advertisement did not sufficiently refer to the website.
The Court found that the growers were not told of the allocation between the schemes nor were they given any indication that the Liquidators suffered under a potential conflict between their duty and interests.
Allocation and conflict
The Liquidators arrived at an allocation of the proceeds of Sale after taking into account the initial allocation made by the purchaser in the contract of Sale and independent advice received by the Liquidators.
This allocation guaranteed to the receivers and managers of Gunns Plantations Limited and to the Liquidators a sufficient pool in each scheme from which the Liquidators could recover fees and expenses and the receivers’ lien could be satisfied.
The Court found that in arriving at the proposed allocation of proceeds the subject of the application, there was an inherent conflict between:
the Liquidators’ duty to act in the best interests of the growers;
their self interest in having a sufficient pool of funds from which to recover their own fees and costs; and
the interest in ensuring that the receivers’ demands were satisfied so that the Sale could be completed.
By reason of this conflict, the Court held that “it is not to the point to contend…that the process of allocation was fair and reasonable, or was informed by independent advice.”
The Court further held that:
While the liquidators may be justified in their opinion that completion of the sale is in the best interests of the growers, they cannot expect the court to relieve them of the potential risks associated with their conflicts unless they have made full disclosure to those who might be affected. They must also provide all growers with an opportunity to adduce evidence and make submissions, if so advised, as to what the allocation ought to be. It is only then that the court can make an informed, equitable adjustment, reflecting the various rights given up.
Ultimately, the Court ordered that the proceeds of sale should be paid into Court, until further evidence, submission and orders.
Lavan Legal comment
The decision of the Court in Gunns is a reminder that where a potential conflict exists between liquidators’ duties and their own interests, it will not be enough for liquidators to rely on independent advice when seeking the Court’s approval and direction under section 511 of the Act.
We recommend in any similar application in circumstances where a conflict (or potential conflict) exists, liquidators should:
advertise (or otherwise inform the creditors) any proposed application sufficiently to ensure that adequate notice of all elements of the application is given;
provide creditors with an opportunity to oppose any application; and
ensure or arrange for creditors to be represented if necessary.
