IN BRIEF - JUDGMENT OPENS SCOPE OF LIQUIDATOR'S DUTY TO
CREDITORS BEING EXTENDED TO ACTIONS BEYOND SELLING COMPANY'S
Declaration of interest: Colin Biggers & Paisley acted
in the case discussed in this article.
Nominees Limited v McGoldrick (No. 3)  VSC 78, the
Supreme Court of Victoria has held that a liquidator owes a common
law duty of care to guarantors when exercising a power of sale to
realise assets of the company in liquidation. The judgment will be
of great interest to insolvency practitioners as it is the first
time in Australia that a Court has determined that such a duty of
care exists after a full trial.
RACSO DEFAULTS ON LOANS SECURED BY MORTGAGE OVER VACANT LAND IT
OWNED, LIQUIDATORS APPOINTED
The defendants were from time to time directors of two companies
known as Racso Pty Ltd and Zido Pty Limited. Racso and Zido
borrowed money from Perpetual Nominees Ltd, as custodian for
OnePath Funds Management Ltd, a financier and responsible entity
for a mortgage pool. The defendants guaranteed the liability of
Racso and Zido to OnePath pursuant to written guarantees. The loans
were secured by a mortgage over vacant land owned by Racso that
were executed in favour of Perpetual. The land was Racso's only
Racso defaulted on the loans owing approximately $4.6 million.
Subsequently, Mr Sule Anautovic and Glenn Crisp of Jirsch
Sutherland were appointed as joint and several administrators of
Racso. Shortly afterwards it was resolved that they should be
appointed as joint and several liquidators.
The liquidators commenced a process for sale of the Racso land.
At the conclusion of the sale the land was sold for $3 million
leaving a shortfall owed to Perpetual. Perpetual sought to recover
the balance of its debt from the defendant guarantors.
In their defence the defendants alleged that the liquidators
owed them various duties which bound them to act in the
defendants' interests, as sureties of Racso's liability to
Perpetual, to ensure that the Racso land was sold for market value.
These alleged duties were said to be a duty of care; a duty to act
in good faith; and a duty to refrain from acting in a manner in
which no reasonable administrator or liquidator would act. Various
criticisms of the sales process were alleged that were said to be
in breach of the alleged duties.
LIQUIDATOR OWES COMMON LAW DUTY OF CARE WHEN EXERCISING A POWER
OF SALE TO AVOID ECONOMIC LOSS CAUSED TO GUARANTOR, JUDGE
In rejecting the defendants' defence and vindicating the
liquidators' and the associated real estate agents'
conduct, Vickery J found that the criticisms of the sale process
were unfounded. However, his Honour's finding that a liquidator
owes a common law duty of care when exercising a power of sale to
avoid economic loss caused to a guarantor runs against the widely
accepted view in Australia that receivers (by analogy) do not owe a
common law duty of care to the mortgagor but only an equitable duty
to act in good faith and for a proper purpose.
It has long been considered that liquidators have a duty to
discharge their obligations with due care and skill and in the
interests of creditors as a whole, in addition to their statutory
duties as officers of the company. In the case of realising company
property, it is reasonably settled that the liquidator's duty
is to take reasonable care to get the best price possible in the
circumstances, similar to the statutory obligations of controllers
The exact nature of the duty has not been settled, but until
this judgment it was generally not considered to be in the nature
of a common law duty of care owed to all creditors or to
guarantors. The standard required to breach a duty of care is a
lower standard than is required to prove that a receiver,
administrator or liquidator acted in bad faith or without proper
purpose. In analysing the liquidator's actions in realising
company property in terms of common law duty of care principles,
the judgment opens the scope of the liquidator's duty to
creditors being extended to actions beyond selling the
However, the lesson from the case, given his Honour's
findings on the content of the duty, is that if a liquidator
discharges his or her duties to the company as has always been
required, liability to a third party guarantor is very unlikely to
The Supreme Court of Victoria has gone some way to solidify a consistent trend in three important insolvency principles.
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