Liquidators’ distributions of shares in specie: ‘All’s well that ends well’

The primary purpose of a liquidation is to liquidate the assets of the company so that the proceeds can be applied in satisfaction of its liabilities and the surplus, if any, distributed among the shareholders. However, it is not always necessary for the liquidator to realise the assets and pay the proceeds to creditors in the form of dividends. The recent decision in Longley v ACN 090 609 868 Pty Ltd (In liq) (formerly Solar Systems Pty Ltd) (2011) 81 ACSR 517 (Longley) shows that, in certain circumstances, a distribution in specie is appropriate and permissible. In specie is a Latin phrase which means ‘in its actual from’. A distribution in specie is therefore, a distribution of an asset in its present form, rather than a distribution of the proceeds of sale of the asset.

In Longley the administrators of a group of companies sold the principal assets to a subsidiary of Silex Systems Ltd (Silex). The consideration for the sale included shares in Silex. The administrators became the liquidators of the corporate group and in that capacity they sought directions that they were allowed to distribute the shares received from Silex as part of the purchase price to the creditors of the group.

Finkelstein J noted that a creditor in a winding up does not have a right to an individual share of the assets of the company, merely a right to share in the proceeds of sale. However, his Honour accepted that a company and its creditors could, by unanimous agreement, substitute a different obligation from the obligation to repay the debts. Hence, there was no reason why approximately $18 million in shares in Silex that formed part of the purchase price or consideration for the sale of the group’s assets could not be distributed to the group’s secured creditors in specie. This enabled the liquidators to finalise their administration quickly and it was not necessary for the liquidators to incur extra costs by continuing their administration so that the shares could be sold and the proceeds paid to the secured creditors as dividends in the winding up.

Lavan Legal comment

Liquidators should consider seeking a declaration that they are entitled to distribute the company’s assets in specie where they have the unanimous consent of the creditors. This may avoid delays in finalising their administration as a result of a moratorium on the sale of the shares under escrow arrangements. However, liquidators must be careful to ensure that the rights of contributories are not prejudiced by the transfer in specie. It would be advisable, therefore, to make sure that the assets transferred to the creditors have a net market value less than the amount due to the creditors. It is also worth noting that trustees of self-managed superfunds are generally prohibited from acquiring assets from related parties. This is a matter on which specific taxation advice should be sought.

If you want further information about distributions in specie, please contact partner Alison Robertson on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or special counsel Jim O’Donovan on (08) 9288 6804 / jim.odonovan@lavanlegal.com.au.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.