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Case introduction

Discuss about the Case Study of Asden Developments Pvt Ltd v Dinoris.

The liquidator is provided the power to manage the organization in a way which any officer or the directors of the company can do. They are also in a fiduciary relationship between the liquidator and the company whereby the liquidator is imposed with fiduciary duties. In addition as the liquidator becomes an officer of the company he would also be subjected to the provisions of the Corporation Act (Cth) and the statutory duties of directors will be applicable in relation to his functions.  This paper discusses the case of Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788 where the provisions in relation to the breach of duties by the directors had been discussed by the courts.

There are many duties which are imposed in the liquidator by the operation of law. In Australia several provisions of the CA set out the powers, functions, duties and liability of the liquidator. There is significant pressure imposed on the liquidators while performing their duties.  In the case of Asden Developments Pty Ltd (in liq) v Dinoris (No 3) the issue before the court was that a simple failure to simply make a phone call will lead to breach of duties under the legislation. In this case the court found that the liquidator contravened the provisions of section 180 of the CA which asks a person to act with diligence and care while discharging their duties as he did not personally make a call to the directors of the company for the purpose of investigating about a fund transfer made just before the company had entered into liquidation. The purpose for which the company in context had been incorporated was property development which was done by the members of the Nichols Family. In this company the sole shareholder and the director was Ms Nichols. It had been asserted by the director that she had been misled in  relation to the affairs of the company by her husband. Money had been borrowed by her when it was apparent that the company was facing financial difficulties. The company indulged into an ‘elaborate’ scheme which was not in the best interest of the creditors and also was not in compliance with the duties which the directors have in relation to the CA.  In relation to the scheme an organization had been incorporated called CJI Investments Pty Limited. The bank out of the company was formed in Bank of Queensland. The money of Asden was sent to a company called Urban Property where the sole director was PITs. The Company had transferred such funds to TJI and Asden was placed in liquidation. The consequence of the transfer was that all of the money of Asden was divided between the director and PIT and Asden was left with no money before liquidation. The liquidator in context was informed by PIT that if he wants to communicate with Ms Nichols he should do so via PIT. After being appointed he got to know about the transfer of money and thus contacted PTI. The liquidator had been notified that the director did not get the money personally. There was no attempt to personally contact the director on the part of the liquidator. Funding from the creditors had been taken by the liquidator to conduct a public examination of the director.

Breach of duties

Section 180 of the CA is the primary statutory duty which the liquidator in context had towards the company being the officer of the company. The duty provides that while performing obligations which a officer or director have in relation to their role in the company they must show at least the level of care and diligence which a reasonable director would do if they would have been positioned in the same situation.   Thus a person who has been provided the role to carry out the functions of a company he would not be held to have complied with the provisions of diligence and care where a reasonable director would have made an additional effort to address the problem of discharge the function in the best interest of the company. Compliance with section 180(1) id also subjected to the business judgment rule incorporated in the CA through the provisions of section 180(2). In this case the proceedings had been brought against the liquidator as a newly appointed liquidator Mr Clout made an allegation that the duty of care and diligence had been breached by the liquidator being the officer of the company as he did not telephone the director Ms Nichols for the purpose of demanding to return the money which has been transferred as soon as it had been discovered by him that the transfers were fraudulent in nature.

While analyzing the claim and the issue the court held that the same duties which are owed by the directors are also owed the liquidator of a company. It is the duty of the liquidator to meet due diligence and high standards which are expected of an expert liquidator which is paid to use their professional skills in the best interest of the creditors and the company as provided in Australian Securities and Investments Commission v Dunner (2013) 303 ALR 98; [2013] FCA 872. The skill and care which is owed by the liquidator has to be exercised to a degree which can be considered as reasonable under all situations. This reasonable care and diligence has to be analyzed by taking into consideration the fact that some commercial situation may involve business decisions and actions which may be different for person to person. The court further stated in this case that the test in this situation is not whether the liquidator took a decision which no reasonable liquidator placed in his position would take in relation to the complained matters as analyzed in Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485 at 497.  The liquidator would be liable for being negligent where there is a failure on their part to exercise a degree of skill and care which is imposed on them by the virtue of the office of an liquidator. Further it had been stated by the court that the liquidator in this case cannot us the business judgment rule in relation to the duty of taking custody and control of the assets of the organization as there is no commercial or business activities are involved in relation to such duties and the business judgment rule is only applicable in relation to business decisions as held in Viscariello v Macks (2014) 103 ACSR 542. The court further stated that the test in relation to the fact that the duties of directors have been breached or not is objective and thus needs an analysis in relation to whether the actions depicted the needed extent of diligence and care which can be considered as reasonable in all situations by taking into consideration the expected degree of diligence and care of a professional and skilled accountant who is placed in the position to the liquidator relying upon Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364.  The court further clarified through its decision that it is not the case that the liquidators must contact the directors in context directly in all situations which involve the winding up of a company. It had been emphasized by the court that the situation in context of Asden was different to the situation and where there is a needs of taking into account the relevant circumstances the rule did not provide for an inflexible rule and also limit the common discretion which the liquidator holds while carrying out the liquidation.

Analysis of the court decision


In the situation where there has been a transfer of money the day before the appointment of the liquidator took place a withdrawal slip has been obtained by the liquidator showing that the director signed the withdrawal and where some doubts had been expressed by the liquidator in relation to the truth of what PIT told, it was held by the court that there must have been an attempted contact on the part of the liquidator to the director directly for the purpose of finding out in relation to the withdrawal. It was rightly held by the court in this situation that the failure of the part of the liquidator is the breach of section 180 of the Act.  It had been stated by the judge in conclusion that it cannot be identified  that there had been a display of care and diligence by the liquidator which would have been done by a competent liquidator when the decision had been made in later afternoon and stayed on such decision as to not making an attempt to directly contract the directors and ask about the funds which had been withdrawn as per Jenkins v Jonkay Pty Ltd [2007] FCA 858. Such a decision taken on the part of the liquidator is not a decision which would have been taken by a professional in the same situation against the director in context.  However it had been analyzed by the court that the breach of duty which had been done by the liquidator in relation to section 180 had not caused any loss to the company. It had been analyzed by the court that even if the liquidator had taken a decision to contact the director directly there are high chances that the director would have denied to pay back any money. It had been further analyzed by the court that the director was relying on the advice provide by PIT and there would have been an advice not to repay the money to the liquidator. It had been stated by the court that PIT implemented a scheme through which it wanted to protect the director form financial ruins. This was because throughout the cross examination of the director it had been stated by her that she had been advised by PIT in  relation to each step of the scheme.

Conclusion

The findings of the court can be considered as a devastating critique in relation to PITs actions. The decision meant that the duty imposed on the liquidator may be violated where all reasonable steps have not been taken in relation to recovering the assets of the company even if the step involves making a simple phone call. The court in this case held that the liquidator in the situation was not liable to provide any compensation to the company cost consequences in relation to the breach will still be applicable. It was further clarified that the liquidator does not gave similar duties like that of a controller when assets of a company are being sold, however it still liable to be criticized by the affected parties.  In this case whether or not the company was entitled to be compensated by the liquidator was dependent upon the fact that any damages had been caused to the company due to the breach of the duty by the liquidator or not. As the court analyzed that even if the liquidator would not have breached the duties the director would not have repaid the company and thus the liquidator is not liable to compensate the company. This was a right decision as section 1317S of the CA requires actual harm to identify compensation.

The decision of the court that the duties had been breached by the liquidator by simply failing to make a phone call may be considered as harsh. However it has been emphasized by the decision that the liquidator constantly needs to be vigilant and thus small omissions can also lead to serious consequences.

The decision further implied that where there is no loss cased to the company because of the breach of duty by the liquidator than there is no liability on the part of the liquidator to compensate the company.

The decision provide in the case also sets out a reminder that duties are owned by the liquidators to the company, it contributors and the creditors with respect to the sale of the company’s assets. There is no duty imposed on the liquidators in relation to section 420 related to the sale of assets and the court are reluctant to have a second opinion in relation to whether the decision making of a liquidator involves commercial judgment. There is no application of the business judgment rule in relation to the decisions taken by the liquidator

References

Asden Developments Pty Ltd (in liq) v Dinoris (No 3) [2016] FCA 788

Australian Securities and Investments Commission v Dunner (2013) 303 ALR 98; [2013] FCA 872

Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364

Corporation Act 2001 (Cth)

Jenkins v Jonkay Pty Ltd [2007] FCA 858

Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485

Viscariello v Macks (2014) 103 ACSR 54

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