Unsecured creditor gets better financial return by taking active role in liquidation process

When liquidators are appointed to a company, unsecured creditors often don’t take much of an interest in the liquidation process, immediately assuming all is lost.

The recent Federal Court of Australia decision of Robinson, in the Matter of ACN 069 895 585 Pty Ltd (formerly known as Waterman Collections Pty Ltd) (in liq) [2013] FCA 706 is an example of a case where an unsecured creditor was able to secure a better financial return by taking an active role in the liquidation process, assisting the liquidator with a number of claims.

Facts

The case involved the liquidation of Waterman Collections Pty Ltd (Waterman).
In the liquidation an unsecured creditor, Insurance Australia Limited (IAL), was owed approximately $600,000.

IAL had carried out examinations into the affairs of the company and had discovered matters that indicated grounds to commence recovery proceedings for uncommercial transactions under sections 588 and 588FF of the Corporations Act 2001 (Cth). There were also some unresolved issues with the amount claimed for remuneration and disbursements by a prior liquidator, and a possible claim against a former employee who had allegedly misappropriated money from Waterman in the order of $1 million.

The liquidator had insufficient funds to either commence or contest proceedings relating to the various claims with Waterman having less than $1,000 in its bank account at the relevant time.

IAL entered into a series of funding agreements with the liquidator to assist the liquidator pursue or contest the claims. Ultimately the amount of funding provided was $240,542.

The funding provided by IAL enabled the liquidator to add $716,455 to the company’s property pool, through a number of commercial settlements regarding the various claims.

The liquidator and IAL applied to the Court for orders relating to the distribution of this property.

Decision

The Court ordered, pursuant to section 564 of the Corporations Act 2001 (Cth), that IAL should have priority over other unsecured creditors both in terms of the funding provided to the liquidator and the amount it was owed.

In deciding the order that should be made the Court considered factors that included the following:

• all creditors were given the opportunity to assist with funding with only IAL agreeing to assist;
• the risk taken by IAL that the claims would not yield any results and the funding would be lost;
• the actual outcome of the exercise –  that the amounts recovered were more than the funds contributed and that the expenditure incurred was reasonable;
• the significant assistance provided by IAL to the liquidator;
• the high value of the debt owing to IAL compared to the total creditor pool;
• the amount of time that IAL remained out of pocket in relation to its funds;
• that without the assistance of IAL, there would have been no assets to distribute to creditors as the liquidator had no funds to either pursue or contest the claims;
• the public interest consideration of encouraging creditors to provide indemnities and funding to enable a liquidator to pursue remedies that would result in recovery of company property; and
• that there was no adverse response to the proposed distribution from any of the unsecured creditors.

Comment

In difficult economic times, the risk of finding oneself as unsecured creditor owed money from a company in liquidation obviously increases.

Depending on the circumstances, it may be worth investing some time and money assessing whether the financial return will be better by assisting a liquidator with pursing claims to recover company property.

Of course, no-one wants to ‘throw good money after bad’ and it is therefore important to get frank and realistic advice on the strength of any claims and the costs and benefits associated with them.

If you would like further information on this case or these these type of issues, please contact Miranda Bird or Rocco Russo on +61 7 3231 2444.