Court rejects bid to appoint special purpose liquidator - Insolvency/Bankruptcy

This week's TGIF considers In the matter of Jabiru Satellite Limited (in liq) and NewSat Limited (in liq) [2022] NSWSC 459 where the Court declined to appoint a special purpose liquidator to pursue claims available to the company.

Key Takeaways

On any application to appoint a special purpose liquidator, it will be critical to the exercise of the court's discretion to demonstrate that the appointment will be just and beneficial to creditors.
If the appointment is to pursue potential recovery actions, the terms of any funding arrangement will be closely analysed, including the proposed fee to any identified funder.
If a funding fee exceeds usual market rates, evidence will be required to justify that fee so as to ensure that the appointment and proposed claim can be regarded as beneficial to the winding up.

What happened?

The NewSat Group was established to launch and manage a commercial satellite to provide mobile communications carrier services. On 17 April 2015, administrators were appointed to several companies (the Companies) within the NewSat Group. On the same date the administrators were appointed, secured lenders appointed receivers who attempted, unsuccessfully, to restructure the business and complete construction of the satellite. By creditor resolution, the NewSat Group was subsequently placed into liquidation.

The Liquidator's report to creditors identified a claim, available to the Companies, against the secured lenders for breach of an implied duty of good faith or unconscionable conduct under the Australian Consumer Law. That claim had been commenced by a creditor of the NewSat Group, with the Liquidator's consent, on the condition that proceedings would not be served until funding terms were agreed between that creditor and the Liquidator.

When no agreement could be reached, the creditor brought an application to appoint a special purpose liquidator (SPL) under section 90-15(1) of the Insolvency Practice Schedule (Corporations) which authorises a court to make such orders as it thinks fit in an external administration, including the appointment of an SPL.

The relevant principles

The case law demonstrates that the following factors are relevant to the exercise of a court's discretion on such an application:

whether there are matters that require investigation by a liquidator with a view to possible recovery to creditors (such as breaches of statutory and/or fiduciary duties, voidable transactions or claims against specified third parties);
if the current liquidator has insufficient funds to conduct such investigations and insufficient prospects of obtaining funding;
if a creditor is prepared to fund the investigation, and any recovery action, but only on the condition that another liquidator be appointed; and
whether that appointment would be just and beneficial to the winding up and creditors as a whole.

Moreover, a court is required to take into account how the SPL will be funded, whether the SPL will burden the company with added costs and how else the appointment might impact the liquidation and potential return to creditors.

The determination

The Court dismissed the application and declined to appoint the SPL. In reaching this conclusion, Justice Black observed that, despite the fact that the claim appeared reasonably arguable and the Liquidator had not been able to secure funding, the evidence did not establish that the appointment would be beneficial to the winding up and creditors as a whole.

While indicating several reasons for this determination, his Honour placed considerable emphasis on the terms of the proposed funding arrangement, including that:

the potential funding fee was 70% of any resolution sum;
the funding fee would increase to a higher percentage if an appeal was required; and
any recoveries would be directed initially to costs, then to the Liquidator for priority creditors, followed by the funder and then finally for distribution in accordance with the priorities set out in the Corporations Act (2001) (Cth).

With respect to the funding fee, based on the damages calculations his Honour noted that it had the potential to be enormous and the reasons for the appointment of the SPL were undermined by that size.

With this in mind, his Honour found that the Court should not proceed to make the appointment on the mere prospect of a modest return to priority creditors and a residual return to unsecured creditors where the substantial majority of any recovery proceeds would ultimately be diverted to an entity associated with shareholders who would have a lower priority in a winding up.

Additionally, Justice Black found a lack of evidence to support the view that the funding creditor had capacity to fund the proceedings, noting that it appeared to have minimal assets and there was no recourse to the assets of its holding company.

Comment

This decision provides useful guidance to insolvency practitioners and their advisers on the approach a court may adopt when the appointment of a special purpose liquidator to commence proceedings is sought.

When confronted with a funding fee that exceeds ordinary market rates, it may be necessary to provide an analysis of why such a fee is appropriate and how the appointment will ultimately benefit the winding up and creditors as a whole.

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.