The powers of liquidators are fairly wide and mostly designed for the efficient winding up of a company’s affairs. The powers of court appointed liquidators are set out in section 477 of the Corporations Act, and these apply to voluntary liquidators through section 506 of the same Act. The Act gives liquidators the wide ranging power to:
477(1)(a) carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business; and
(c) make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging that they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable;
Along with a range of other powers, they may also:
477(2)(a) bring or defend any legal proceeding in the name and on behalf of the company; and
(c) sell or otherwise dispose of, in any manner, all or any part of the property of the company; and
(m) do all such other things as are necessary for winding up the affairs of the company and distributing its property.
A liquidator can compromise creditor’s claims and take certain actions that may continue for some time, if not some years. The Act does not appear to limit the ability for a liquidator to trade a multi-million dollar business for an extended period, sell multi-million dollar assets and commence legal actions that may be before the courts for some years. Trading on, selling assets and taking legal actions are all done regularly – and without requiring creditors’ or the court’s approval.
It seems a little strange that the Act limits two specific powers. Sub-section 477(2A) limits the amount of a debt that may be compromised by a liquidator.
477(2A) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than:
(a) if an amount greater than $20,000 is prescribed–the prescribed amount; or
Regulation 5.4.02 sets the prescribed amount, which is currently $100,000. The amount itself is not a particular issue, but the use of the provision could be set better. Currently it means that liquidators cannot even compromise a $110,000 debt down to $105,000 in full settlement without creditors’ approval – and it would cost more than $5,000 to get that approval.
Maybe some rewording of the provision stating that we cannot compromise debts over $100,000 by more than (say) 10% of the debt amount – or some other calculation based on ‘materiality’ – would be more efficient.
Sub-section 477(2B) seems to be more challenging. It says that liquidators cannot enter into agreements where the terms will extend longer than 3 months.
477(2B) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or a charge) if:
(a) without limiting paragraph (b), the term of the agreement may end; or
(b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.
Strictly speaking debtors cannot pay off their $10,000 debt at $2,500 for 4 months unless creditors approve. We cannot sell an asset or business without approval – even with all the security and retention of title possible – if the purchaser needs more than 3 months for due diligence or to make the payments. And given that obtaining approval entails calling a creditor’s meeting or applying for a court order, the associated costs may be out of proportion to the amounts involved.
This time period seems short when liquidators can take other actions (as long as they are not ‘agreements’) that will run for far longer than 3 months without any approval. Considering that it is not uncommon for debtors, directors etc to want to settle actions against them by paying amounts over some short period time. It seems a little strange that we can spend 2 years in the courts seeking judgment, but need approval for that person to settle the debt by paying the amount over more than 3 months.
We would suggest that this time limit be extended to at least 6 months, but probably 12 months. We do believe that agreements that take longer than that should have approval, and creditors should be advised of all agreements regardless of the length of time involved. But the current 3 months seems too short.