June 2010

It is common, particularly in large liquidations, for a committee of inspection representing creditors (“COI”) to be appointed, both to exercise a general oversight of a liquidator, and avoid the need for a liquidator to convene regular meetings of all the creditors. 

One.Tel Limited (In Liquidation) (“One.Tel”) is an example of such a large creditors’ voluntary liquidation (“CVL”) where a COI has been appointed. 

The special purpose liquidator of One.Tel (“SPL”) has filed proceedings against a number of defendants, arising from the cancellation of a renounceable rights issue shortly before the appointment of administrators to One.Tel in May 2001 (“SPL Proceedings”).

On 20 May 2010, in the matter of Onefone Australia Pty Limited v One.Tel Ltd [2010] NSWSC 498 (“Onefone Proceedings”), Justice Barrett delivered a judgment referring to the SPL’s successful confidential application, heard in closed Court, for the approval of agreements relating to the funding of the SPL Proceedings.  Justice Barrett has made orders approving the agreements relating to funding, under s.477(2B) of the Corporations Act 2001 (“Act”), as applied by s.506(1A) of the Act to a CVL.

Prior to delivering his most recent judgment, Justice Barrett made a number of important rulings and observations in the Onefone Proceedings concerning the powers, role and functions of a COI in a CVL process, in judgments delivered on 12 December 2008 and 16 November 2009, including:

Judgment dated 12 December 2008

• A COI has no power to direct a liquidator, to decide what the liquidator should or should not do, or to control or monitor the liquidator’s expenditure;
• A COI’s position involves exercising general oversight of a liquidator.  Unless a particular power is conferred on a COI by statute, the COI’s position involves, at the very most, a right to be consulted, to advise and to warn;
• A COI has a specific statutory power and responsibility to involve itself in decisions about the liquidator’s remuneration – it cannot simply decide to vacate the field in relation to those responsibilities;
• A liquidator has a clear entitlement to remuneration - there is no expectation that a liquidator will act gratuitously. That right to remuneration is not subject to negotiations or discretionary withdrawal.  The only question that can ever be contentious is the amount of the remuneration.

Judgment dated 16 November 2009

• There is no reason a liquidator should share with a COI detailed information concerning a liquidator’s correspondence, discussions and negotiations with potential funders;
• A COI cannot complain about a liquidator’s decision that the administration is best conducted by not consulting with a COI on certain funding matters, as it is not some kind of supervisor whose consent must be obtained;
• In the One.Tel matter, pursuit of litigation funding formed part of the SPL’s function and in no way forms part of the function of the COI of One.Tel.  It did not matter that the COI of One.Tel did not share the SPL’s confidence that he would secure a funding proposal.

Judgment dated 20 May 2010

In his judgment delivered on 20 May 2010, Justice Barrett gave further guidance in respect of a COI’s role, particularly in the context of a liquidator seeking the Court’s approval of a funding agreement, including:

• Each of the Court, a COI and the general body of creditors are alternative approving authorities under s.477(2B) of the Act.  Each may act independently of the other, although s.547 of the Act enables the Court to seek an expression of the wishes of the general body of creditors, if minded to do so;
• A liquidator is justified in entering into a funding agreement only having received the approval of the Court and without seeking the approval of a COI or creditors;
• A liquidator is justified in seeking the Court’s approval of a funding agreement without informing a COI or creditors of the identities of the third parties involved in the funding agreement;
• Where a liquidator approaches the Court and the Court grants approval, there is no requirement or expectation that a COI be consulted either in advance of the application or after the approval has been granted;
• It is for the liquidator alone to decide whether, and if so, to what extent the COI should be consulted on the matters concerning Court approval of a funding agreement.

A question arising from the judgment of 20 May 2010 has been removed to the Court of Appeal on the application of some of the COI members and a party which claims to be a creditor of One.Tel.  That question deals with whether those parties had standing, and should have been heard, in the SPL’s application for approval of a funding agreement. 

Notwithstanding the removal of that question for consideration by the Court of Appeal, the orders approving the entry of the SPL into a funding agreement have not been stayed.

O’Neill Partners has a depth of experience in providing practical expert advice regarding the roles and responsibilities of all stakeholders in corporate insolvency administrations, including administrators, liquidators, officeholders, creditor committees and creditors.

This article has been prepared by our Chairman & Senior Partner, Michael O’Neill, and Ted Popper, Senior Solicitor, and we invite you to contact either Michael or Ted for further information about the matters discussed.

The contents of this article are intended to provide only a general summary on matters of interest and are not comprehensive, nor does this article constitute legal advice.  You should seek legal or other professional advice before acting or relying on any of the content of this article.

© O’Neill Partners – Commercial Lawyers, 2010