This week's TGIF considers State of Victoria v
Goulburn Administration Services (In Liquidation) and Ors
 VSC 654, in which Special Purpose Liquidators were appointed
despite a potential conflict arising from their firm having
conducted compliance audits of the companies.
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
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
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
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
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
WHO IS AN "AUDITOR" UNDER SECTION
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.
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Courts, through judicial discretion, supervise the proposed transition from winding up to a deed of company arrangement.
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