Am I too special? Appointment of Special Purpose Liquidators where the firm was involved in a previous compliance audit - Insolvency/Bankruptcy

This week's TGIF considers State of Victoria v Goulburn Administration Services (In Liquidation) and Ors [2016] VSC 654, in which Special Purpose Liquidators were appointed despite a potential conflict arising from their firm having conducted compliance audits of the companies.

BACKGROUND

The first and second defendants operated registered education and training organisations (RTOs) in Victoria. As RTOs, between 2013 and 2016 they received substantial subsidy payments from Victoria's Department of Education and Training (the plaintiff), pursuant to respective funding contracts.

In late 2015 and early 2016, Ernst & Young (EY) were engaged by the plaintiff to conduct compliance audits of the RTOs to determine whether they were in compliance with their funding contracts.

Shortly after EY were engaged, the RTOs were voluntarily wound up and the third and fourth defendant (who were not from EY) appointed as liquidators (the Liquidators). The Liquidators had insufficient funds to carry out any substantive investigations into the affairs of the RTOs.

The plaintiff, as a substantial creditor of the RTOs (based on claims arising from breaches of the funding contracts), sought to have special purpose liquidators (SPLs) appointed to investigate the affairs of the RTOs.

NEED FOR INVESTIGATION

His Honour agreed with the plaintiff that there was a real need to investigate the affairs of the RTOs - to determine whether the directors or officers of the RTOs had breached their duties and to examine any avenues for recovery (including potential voidable transactions and the genuineness of related party transactions).

The plaintiff, being a substantial creditor, was willing to fund the investigations (by a confidential indemnity deed) but only if their chosen special purpose liquidators (SPLs), Adam Pauls Nikitins (Nikitins) and Justin Denis Walsh (Walsh), both of EY, were appointed to conduct the investigations.

THE COURT'S DISCRETION TO APPOINT SPECIAL PURPOSE LIQUIDATORS

The court has power to appoint SPLs in both a compulsory and voluntary winding up. The essential question for the Court in exercising this discretion is whether the appointment of a SPL would be just and beneficial to the general body of creditors.

The court examined the key factors relevant to the discretion and held it would be beneficial to the administration of the winding up and in the interest of the RTOs general body of creditors for the SPLs to undertake the specific work envisaged.

POTENTIAL CONFLICT OF THE SPECIAL PURPOSE LIQUIDATORS

The Liquidators did not object to the appointment of SPLs, but expressed a view that Nikitins and Walsh had a potential conflict due to EY's previous involvement as "auditors". Reference was made to s 532(2)(c)(iii) of the Corporations Act 2001 (Cth), which prevents a person acting as liquidator without leave of the court where the person "is an auditor" of the company.

While his Honour saw it appropriate for the Liquidators to raise this issue, he saw no reason why Nikitins and Walsh ought not be appointed as SPLs. Central to that decision was:

the "audits" conducted by EY were in relation to business processes and compliance under the funding contracts;
no question arose as to the competency of the audits that might create a conflict of interest if Nikitins and Walsh were appointed as SPLs;
any claims by the plaintiff arising from the audits would be determined by the liquidators not the SPLs; and
s 532(c)(iii) did not prevent the appointment as neither Nikitins or Walsh had been auditors of the RTOs, nor had any person from EY undertaken an audit as contemplated by the Corporations Act.

WHO IS AN "AUDITOR" UNDER SECTION 532(2)(C)(III)?

Although no conclusive finding was made, His Honour commented that the word auditor is not defined in the Corporations Act and may be capable of a wide definition. However, His Honour did not consider that the limited and directed investigation of Nikitins, Walsh, or EY, would make them auditors in the relevant sense.

COMMENT

The decision suggests that where a firm has previously undertaken a contractual compliance audit of a company, members of that firm can be subsequently appointed as liquidators (including SPLs) provided there is no potential for conflict.

In cases where the firm's previous involvement may be viewed as a financial audit (in the sense contemplated under the Corporations Act), where as a result of the involvement there is a potential for a conflict of interest to arise or where the liquidators to be appointed were involved personally, it is prudent to seek approval of the appointment from the court.

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