Quit horsing around: Leave to proceed against court-appointed liquidator denied - Insolvency/Bankruptcy

This week's TGIF considers a decision of the Supreme Court of New South Wales on whether leave should be granted for proceedings against a court-appointed liquidator personally.

Key Takeaways

A grant of leave is required to sue a court-appointed liquidator. Leave must be sought in the Court in the action in which the liquidator was appointed.
One of the rationales behind this requirement is that, when acting in such a position, the liquidator's actions are deemed to be actions of the court.
A factor in the exercise of the court's discretion is the sufficiency of the evidence adduced on prospects. While there is no specific threshold, and a prima facie case is not required, there must be more than mere assertion.

What happened?

On 11 June 2020, and following an investigation by NSW Fair Trading, a liquidator was appointed by the Supreme Court of NSW to the Horses for Harmony foundation (the Company). The Company, a horse therapy charity, had purchased a 1959 Chevrolet Corvette (for an inflated price from a director of the Company) so it could be offered as a prize in a fundraiser. More than $250,000 in raffle tickets were sold however, following the draw, no winner was announced and the Company could not be contacted.

In an application to wind up the Company, an administrator's report revealed there were no assets to repay those who had purchased tickets or the one of the Company directors (who claimed to be owed $63,000 as a related creditor, including $10,000 worth of silver coins offered to the charity for the prize).

A liquidator was appointed and arranged for an auctioneer to sell the vehicle for the benefit of the Company's creditors. During the auction, which was conducted online, there were technical difficulties which meant a second auction was required. The vehicle was sold at that second auction. However, the technical problems which impacted the first auction led to an email being issued by the auctioneer to one of the bidders that they had been successful in that first auction.

Proceedings were later commenced by the bidders in that first auction (the Plaintiffs) against the auctioneer, the Company and the liquidator in his personal capacity seeking relief on the basis that they had purchased the vehicle at the first auction. The Plaintiffs failed to seek leave to proceed against the Company or against the Court-appointed liquidator prior to commencement. This decision concerned the application for leave which was made by the Plaintiffs nunc pro tunc.

The application for leave

The Plaintiffs argued that claims existed against the liquidator in his personal capacity for conversion and for inducing a contractual breach when the auctioneer purported to offer the vehicle for a second auction and did not deliver the vehicle to the Plaintiffs.

The liquidator adduced evidence of the circumstances of the sale of the vehicle and his arrangement with the auctioneer. His evidence was that, apart from requesting the vehicle be sold at auction and setting its reserve, he did not have an input or control over the procedure. The Court was also provided with details of the Company's financial position which revealed that the assets were insufficient to meet the claims of unsecured creditors (even excluding the Plaintiffs' claim) such that there was a risk a grant of leave would expose the liquidator to substantial costs.

The decision

Black J denied the application on the basis that, given the difficulties with the Plaintiffs' case against the liquidator, the Court could not be satisfied it was an appropriate case in which to grant leave.

In reaching this conclusion, his Honour noted that, in order to impose liability on the liquidator, the Plaintiffs must establish that the auctioneer acted as agent for the liquidator in his personal capacity. This would establish that the liquidator was personally bound as principal by the agreement between the auctioneer and the Plaintiffs.

Black J found the pleading failed to identify facts to establish such agency and, further, observed there was no obvious reason why the liquidator personally would enter into an arrangement with the auctioneers because the liquidator did not own the vehicle, which was ultimately owned by the Company and, therefore, could not contract to sell it.

Moreover, in respect of the claim that the liquidator induced the auctioneer to breach its obligations to the Plaintiffs, his Honour had no evidence to suggest the liquidator personally took any step to prevent the sale being completed and thus failed to see a basis upon which such a claim could be pleaded.

Comment

This decision serves as a useful reminder that leave of the Court is required where an officer of the Court is subject to an action arising from that officer's conduct in discharge of their duties. In such an application, a factor which influences the Court's discretion includes, but is not limited to, the sufficiency of evidence on the merits of the case.