In November 2008, we published an article discussing the limitations placed on the powers of liquidators in undertaking various transactions or making some arrangements. We made the point that liquidators could do certain things – like take legal proceedings – that could take many years to prosecute, but could not enter into any ‘agreement’ that would take longer than 3 months to complete without approval.
This month we discuss the inconsistency between the rights and powers of liquidators and the rights and powers of receivers.
A liquidator has the right to:
477(2)(c) sell or otherwise dispose of, in any manner, all or any part of the property of the company;
A receiver has the right to:
420(2)(b) to lease, let on hire or dispose of property of the corporation;
Both liquidators and receivers have the power to sell the property of a company – though the receiver’s rights are limited to assets that are covered by the security and any restrictions in their appointment. Both have an obligation to try to obtain market value for those assets, and generally the sales process will be very similar (if not identical) regardless of the type of appointment. But there are two significant differences and these were highlighted very recently on current files.
A liquidator can enter into agreements including sales agreements, but if any obligation of any party to the agreement will not be fully discharged within 3 months of the agreement, they must obtain approval from the creditors or the court. This is set out in section 477.
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.
A receiver has no such limitation or obligation.
We recently entered into an agreement to sell the ongoing business of a company. The business was sold through a business broker, was advertised fully and we obtained what everyone thought was a reasonable market price. But the payment of a portion of the sales price is partly based on retention of business factors that will occur over the next 12 months. As it extended for longer than 3 months we had to, and did, obtain approval for the agreement. Full details of the agreement and the terms were made available to creditors etc. during the course of obtaining that approval.
At the same time a receiver sold the nearly-identical business of an associated company. It was only nearly identical as their business was about 3 times the size of ours, and they would have received a correspondingly larger price. The receiver would have followed the same marketing process and obtained a good price for the business, under significantly the same terms. The first difference was that they did not have to obtain any approval from anyone for their agreement to take longer than 3 months. The second difference is that the details of the sale have not been disclosed to creditors – or to us in our capacity as liquidators of that associated company.
Why the inconsistency?
The provisions granting the powers to and setting the limitations of liquidators are inconsistent in themselves. In our last article we made the example that we could commence and run a legal action that may take years to resolve, but without approval could not enter into a simple sale agreement that took longer than 3 months to complete. It is hard to see that 3 months is a magical number for some actions liquidators undertake, but not for others.
It is also hard to see that 3 months is some magical number when it relates to liquidators, but has no magic when it relates to receivers.
One reason that will be put forward for this difference is that receivers are only beholden to their secured creditors where liquidators act for all creditors. But that argument does not hold much substance. Both receivers and liquidators are external administrators dealing with another entity’s assets under the powers of the Corporations Act, regardless of who their ultimate masters happen to be. To have the same powers, but an arbitrary limitation on some of the liquidator’s powers, seem at best inconsistent and frankly does not make a real lot of sense to us.
Maybe something will be done about this at some stage.