A recent decision of the Federal Court of Australia has provided a useful reminder of how the court will determine applications to appoint a provisional liquidator.
In ASIC v ActiveSuper Pty Ltd (No 2)  FCA 234 (ActiveSuper), Gordon J considered an application by the Australian Securities and Investment Commission (ASIC) pursuant to s 472(2) of the Corporations Act 2001 (Cth) (Corporations Act) to appoint a provisional liquidator to MOGS Pty Ltd (MOGS), who was the 12th named defendant in ActiveSuper.
While ASIC’s application was ultimately successful, Gordon J used the opportunity to provide an overview and guidance of the governing appointment principles.
The application to appoint a provisional liquidator was brought by ASIC to:
secure and preserve the assets of MOGS pending the final hearing of the winding up application (against MOGS); and
ASIC sought the appointment of a provisional liquidator for the following reasons:
In excess of $4 million raised from Australian investors and received by MOGS appeared to have been dissipated by MOGS. This required investigation.
MOGS had engaged in transactions with no apparent commercial purpose.
MOGS had contravened the law by maintaining inadequate accounts and records.
The information provided by one of the two directors, Marina Gore, lacked veracity.
MOGS appeared to be insolvent.
Section 472(2) of the Corporations Act gives the court power to appoint a provisional liquidator at any time after the filing of a winding up application and before the making of a winding up order.
The court has a wide and complete discretion whether or not to appoint a provisional liquidator.
In respect of the appointment, the court in ActiveSuper held that:
The power to appoint a provisional liquidator is by no means limited, the grounds on which a provisional liquidator may be appointed are infinite, and all that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order…
However, the court raised the cautionary point that any application to appoint a provisional liquidator is:
…a drastic intrusion into the affairs of the company and will not be done if other measures would be adequate to preserve the status quo: Zempilas v J N Taylor Holdings Ltd (No 2) (1990) 3 ACSR 518.
It will be necessary in any application to appoint a provisional liquidator that the applicant shows that there:
is a reasonable prospect that a winding up order will be made on the application; and
are present factors sufficient to require the exercise of the Court’s discretion to appoint a provisional liquidator prior to the final hearing.
The Solomon six
The court in ActiveSuper held that the relevant principles for appointing a provisional liquidator were as set out by Tamberlin J in ASIC v Solomon (1996) 19 ACSR 73:
the court should only appoint a provisional liquidator where it is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made;
the fact that the assets of the corporation may be at risk is a relevant consideration;
the provisional liquidator’s primary duty is to preserve the status quo to ensure the least possible harm to all concerned and to enable the court to decide, after a further examination, whether the company should be wound up;
the court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience. The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact;
it may be appropriate to appoint a provisional liquidator in the public interest where there is a need for an independent examination of the state of accounts of the corporation by someone other than the directors; and
The court’s difficulty in applying the above factors was a result of limited evidence being presented by MOGS as to the company’s current legal and financial status, including its financial standing. The court held that MOGS’ failure to put forward satisfactory answers and evidence about its current status, particularly in circumstances where MOGS conducted large continuing commercial transactions with wholly innocent third parties (including self-managed superannuation funds), was “suspicious”.
The court held that by reason of the above, and in circumstances where it could not be convinced of the preservation of the MOGS’ assets, the appointment of a provisional liquidator was in the public interest.
Lavan Legal comment
The appointment of a provisional liquidator can be a useful weapon in the arsenal of any creditor, director or shareholder, particularly where the application to wind up a company creates a hostile environment between the parties.
The judgment in ActiveSuper confirms the position that the court’s discretion in appointing a provisional liquidator is almost limitless and can be based on any number of factors.