Viscariello v Macks [2014] SASC 189—New Lessons for Administrators, Liquidators and their Advisers.

On 9 December 2014, the Supreme Court of South Australia handed down a decision which has shed light on the standard of conduct required of insolvency administrators, liquidators and their advisors under the Corporation Act 2001 (Cth) (“The Act”).

FACTS

1. The case involved the liquidation of two companies.
2. J Viscariello was the principal shareholder, director and creditor of the two companies.
3. When it became apparent that both companies were on the verge of insolvency, J Viscariello sought to appoint P Macks (a liquidator) with the view of placing the companies in external administration.
4. During the same period, J Viscariello began liasing with business man, Mr Bart regarding the potential purchase of the companies.
5. It was the view of J Viscariello that the companies would enter into a Deed of Company Arrangement (DOCA) and that this DOCA would incorporate Mr Bart’s proposal to purchase the companies.
6. Despite, J Viscariello intentions, the DOCA did not come about and the creditors of the companies made a decision to place the companies into liquidation.
7. During his appointment as liquidator, P Macks initiated proceedings on behalf of the companies against the wife of J Viscariello to recover a debt in the sum of $28,000.00. He also indemnified a third party in separate proceedings.

ISSUES

Misleading and Deceptive Conduct

J Viscariello alleged that the DOCA did not eventuate because P Macks failed to negotiate and advance the DOCA.

The Court considered whether, via his actions in negotiating the DOCA, P Mack engaged in misleading or deceptive conduct under section 19 of the Competition and Consumer Act 2010 (Cth).

The Court held that a voluntary administrator does not engage in trade or commerce in exercising their statutory functions, powers and duties and us such P Macks could be held to have engaged in misleading and deceptive conduct.

Additionally, P Macks’ conduct was held not to be the reason for the DOCA’s failed, and instead the Court attributed the failure to the major secured creditors and their refusal to accept the DOCA. The Court ultimately considered P Macks’ actions and his decision to support the liquidation was reasonable.

Inducement

The Court also discussed inducement under s595 of the Act which prohibits liquidators from giving, agreeing or offering to give someone valuable consideration with a view of securing their own appointment or nomination as a liquidator or administrator of a company or an administrator of a DOCA. Specifically, it considered what the outcome would have been if P Macks had of supported the proposed DOCA and whether this would have amounted to an inducement. The Court concluded that supporting of the DOCA may have, in this particular circumstance, amounted to an inducement.

Breach of duties

J Viscariello claimed that in initiating proceedings against his wife and indemnifying the third party, P Macks had breached his statutory duties.

The basis of J Viscariello’s allegations was that the litigation was expensive and was not in the companies’ best interests. By June 2005, the legal fees for the matter had reached around $227,00.00.

The Court ultimately held that by engaging in the above conduct, P Macks had breached the duties set out in ss180 and 181 of the Act.

The Courts decision ultimately turned of the following factors:

1. There was a collateral purpose for initiating the proceedings, namely the litigation was used by the liquidator to mitigate a lawsuit that had been brought against him personally by J Viscariello;
2. There was no visible public benefit that could have derived from the litigation—“In the absence of proportionality, a liquidation may generate litigation which is not in the company’s interests but serves instead the financial interests of the company’s professional advisers. That is contrary to the interest of the company’s creditors and the public more generally.”
3. There was little to no prospects of real recovery from the litigation;
4. There was no real strategy nor consideration by the liquidator or his advisors as to the cost effectiveness of initiating the proceedings—“…there is simply no reason why a company in liquidation and the creditors should sustain further losses in the pursuit of that debt ‘as a matter of principle’”;
5. P Macks’ also failed to adequately communicate and disclose important matters to the committee of creditors.

CONCLUSION

The case sets a new standard for the conduct required of liquidators and their advisors when acting on behalf of a company in liquidation. Insolvency practitioners must now carefully evaluate their actions and consider the impact of those actions on the company as a whole including its creditors.

The case suggests that liquidators and their advisors should act prudently, give due consideration to their decisions and actions and ensure that they have a clear and well establish strategy with a legitimate purpose to support those actions. In line with these new standards, insolvent companies, including their creditors, are now able to ensure that liquidators who elect to retain legal advisors during a liquidation ‘shop around’ and retain good lawyers who charge a reasonable rate.

Whether you are the director, member or creditor of a company, the above consideration should be should taken into account when evaluating the actions of insolvency practitioners during the insolvency process.

If you have any enquiries or require assistance with respect to any of the above, please don’t hesitate to contact our office.

Author: Rebecca Quinton, Lawyer

Published: April 2015